Question

XYZ Mfg. Company uses a job-order cost accounting system. This is the company’s first month of operations (no beginning inventories). The company purchases $1,400 of raw materials, paying cash. The materials will be used on its various manufacturing jobs. $900 of raw materials are requisitioned for use on Job. #65, and $200 is requisitioned for Job #71. The remaining raw materials ($300) are still on hand. No other jobs are begun during the month

XYZ makes a payroll entry for the month. The total salary expense is $1,600, and it is paid in cash. Employee time sheets indicated $1,200 of wages went into Job #65, $100 of wages were traced to Job #71, and the remaining $300 of salary was for the company's salesperson, who's salary is deemed to be a period cost, not a manufacturing cost.

During the month, the company paid indirect manufacturing expenses (supplies, insurance, etc.) amounting to $800.00. The company assigns overhead to jobs at the same time it assigns labor costs using a predetermined rate based on labor costs. For XYZ, the overhead application rate is $.50 (fifty cents) of overhead for every $1.00 spent on wages.  

Job #65 is completed, and transferred to Finished Goods Inventory, awaiting sale to a customer.  

REQUIRED:

Assuming there is no additional activity:

            a. How much ($) will be in the Finished Goods Inventory account at month's-end. Show your work.

            b. How much ($) will be in the Work-in-Process Inventory account at month's end. Show your work.  

            c.  Assume the company prepares financial statements at the end of each month. Is the overhead allocated to the two jobs accurate? If not, indicate the difference between applied overhead and actual overhead, and whether overhead was underapplied or overapplied?

            d. When applied overhead does not match actual overhead, what adjustment can be made to better assure that reported income is accurate? Explain.

Answer 1

Requirement a: Compute finished goods inventory as follows

Particulars	Job #65
Direct materials	$900
Direct labor	$1,200
Manufacturing overhead applied ($1,200 × 50%)	$600
Total manufacturing cost of completed job	$2,700

Requirement b: Compute work-in-process inventory as follows

Particulars	Job #71
Direct materials	$200
Direct labor	$100
Manufacturing overhead applied ($100 × 50%)	$50
Total manufacturing cost work-in-process	$350

Requirement c: Compute under or over applied overhead as follows

Particulars	Amount	Amount
Actual manufacturing overhead expenses		$800
Deduct:
Manufacturing overhead applied to Job #65	$600
Manufacturing overhead applied to Job #71	$50	$650
Manufacturing overhead under applied		$150

Requirement d: The under applied manufacturing overhead of $150 can be debited to cost of goods sold so that the income is reported accurately otherwise net income for the period would be higher by $150.