Question

Predetermined Overhead Rate; Applying Overhead; Underapplied or Overapplied Overhead [LO 4-2, LO 4-4, LO 4-5] Ravsten Company uses a job-order costing system. The company applies overhead cost to jobs on the basis of machine-hours. For the current year, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions occurred during the year: a. Raw materials requisitioned for use in production, $190,000 (80% direct and 20% indirect). b. The following costs were incurred for employee services: Direct labor....... Indirect labor..................... Sales commissions................ Administrative salaries ............. $160,000 $18,000 $10,000 $25,000 c. Heat, power, and water costs incurred in the factory, $42,000. d. Insurance costs, $10,000 (90% relates to factory operations, and 10% relates to selling and administrative activities). e. Advertising costs incurred, $50,000. f. Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling and administrative activities). g. The company used 40,000 machine-hours during the year. h. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse. i. Sales for the year totaled $700,000. The total cost to manufacture these goods according to their job cost sheets was $475,000. Required: 1. Determine the underapplied or overapplied overhead for the year. 2. Prepare an income statement for the year. (Hint: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead.)

Answer 1

1)	Actual manufacturing overhead
	indirect materials		(190000*20%)			38000
	indirect labor					18,000
	hear,power and water costs					42,000
	insurance costs		(10000*90%)			9000
	depreciation		(60000*85)			51000
	total actual manufacturing overhead					158000
	predetermined overhead rate = 153000/36000
				4.25
	overhead applied		(4.25*40000)=			170000
	overhead over applied					12000
2)	income statement
	sales					700,000
	cost of goods sold		(475000-12000)			463000
	Gross profit					237,000
	selling and administrative expense					95,000
	net income					142,000
	Selling and administrative expense
	Sales commission					10,000
	administrative salaries					25,000
	insurance costs		(10000*10%)			1000
	advertising costs					50,000
	depreciation		(60000*15%)			9000
	total selling and adm expense					95,000