Question

Exercise 4-31 Cost Flows; Applying Overhead [LO 4-3, 4-4, 4-5) *** Erkens Company uses a job costing system with normal costing and applies factory overhead on the basis of machine hours. At the beginning of the year, management estimated that the company would incur $1,750,000 of factory overhead costs and use 70,000 machine hours. Erkens Company recorded the following events during the month of April: a. Purchased 202,000 pounds of materials on account; the cost was $4.50 per pound. b. Issued 131,000 pounds of materials to production, of which 20,500 pounds were used as indirect materials. c. Incurred direct labor costs of $295,000 and $51,000 of indirect labor costs. d. Recorded depreciation on equipment for the month, $77,900. e. Recorded expired insurance costs for the manufacturing property, $4,600. f. Paid $9,600 cash for utilities and other miscellaneous items for the manufacturing plant. g. Completed Job H11 costing $8,600 and Job G28 costing $82,500 during the month and transferred them to the Finished goods inventory account. h. Shipped Job G28 to the customer during the month. The job was invoiced at 35% above cost. i. Used 9,900 machine hours during April. Required: 1. Compute Erkens Company's predetermined overhead rate for the year. 2. Prepare journal entries to record the events that occurred during April. 3-a. Compute the amount of overapplied or underapplied overhead. 3-b. Prepare a journal entry to close overapplied or underapplied overhead into cost of goods sold on April 30. Complete this question by entering your answers in the tabs below.

Answer 1

1. Predetermined Overhead rate = $1750000 / 70000 = $25 per hour

2.

	Account Titles	Debit	Credit
a.	Raw Materials	$       909,000		=202000*4.5
	Accounts Payable		$           909,000
b.	Work in Process	$       497,250		=589500-92250
	Manufacturing Overhead	$          92,250		=20500*4.5
	Raw Materials		$           589,500	=131000*4.5
c.	Work in Process	$       295,000
	Manufacturing Overhead	$          51,000
	Wages Payable		$           346,000
d.	Manufacturing Overhead	$          77,900
	Accumulated Depreciation		$             77,900
e.	Manufacturing Overhead	$            4,600
	Prepaid Insurance		$                4,600
f.	Manufacturing Overhead	$            9,600
	Cash		$                9,600
g.	Finished Goods	$          91,100		=8600+82500
	Work in Process		$             91,100
h.	Accounts Receivable	$       111,375		=82500*1.35
	Sales		$           111,375
	Cost of Goods Sold	$          82,500
	Finished Goods		$             82,500
i.	Work in Process	$       247,500		=9900*25
	Manufacturing Overhead		$           247,500

3-a.
Actual Overhead = $92250+51000+77900+4600+9600 = $235,350
Overhead applied = $247500
Since actual overhead is lower than overhead applied, overhead is over applied

Overapplied Overhead = $247500 - $235350 = $12150

3-b

Account Titles	Debit	Credit
Manufacturing Overhead	$          12,150
Cost of Goods Sold		$             12,150