Question

Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the year's overhead and relating it to direct labour costs. The budget for 2020 was as follows: Direct labour Manufacturing overhead $1,800,000 900,000 As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $111,300, and 1819C, with total direct labour charges of $390,500. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $223,000, and for 1819C they amounted to $420,400. Total charges to the Manufacturing Overhead Control account for the year were $899,500, and direct labour charges made to all jobs amounted to $1,574,200, representing 248,000 direct labour hours. There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $558,440. Sales for the year amounted to $6,201,300; cost of goods sold totalled $3,629,860; and sales, general, and administrative expenses were $1,856,800. The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the company's practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold. Calculate the under-or over-applied manufacturing overhead for 2020. (Round answer to the nearest whole dollar, e.g. 5,275.) Manufacturing overhead Prorate the amount calculated in part (a) based on the ending balances (before prorating) of Work in Process, Finished Goods, and Cost of Goods Sold. (Round allocation percentage to 2 decimal places, e.g. 15.25% and final answers to the nearest whole dollar, e.g. 5,275.) Allocation Cost of goods sold Finished goods inventory WIP inventory Total $

Answer 1

1) Calculation of the under- Or over-applied manufacturing overhead for 2020

Under Or Overapplied manufacturing overhead

=Actual manufacturing overheads - Applied manufacturing overhead

=$899500-$787100

=$112400 underapplied

*Note:

predetermined overhead rate

= budgeted manufacturing overhead/ budgeted direct labor cost

=$900000/$1800000

= 0.5

Applied manufacturing overhead

=Actual direct labor costs * predetermined overhead rate

=$1574200*0.5

=$787100

2) Apportionment of Under-application of overhead

particulars	Amount($)
Cost of goods sold	3629860
Finished goods	558440
Work in process inventory	1396100
Total	5584400

Note:

Work in process inventory[WIP]:

=Direct materials for 1768 B and 1819 C + Direct labor for 1768 B and 1819 C + manufacturing overhead applied for 1768 B and 1819 C

=[$223000+$420400]+ [$111300+$390500]+ [($111300*0.5)+($390500*0.5)]

=$643400+$501800+[$55650+$195250]

=$1396100

Allocation of underapplied overhead:

Particulars	calculation	Amount($)
Cost of goods sold	112400*(3629860/5584400)	73060
Finished goods	112400*(558440/5584400)	11240
WIP inventory	112400*(1396100/5584400)	28100

3)Preparation of the Income Statement for the company for the year

Particulars	-	Amount($)
Sales		6201300
Less:
Adjusted cost of goods sold (COGS+underapplied overhead allocated to COGS)	$3629860+$73060	(3702920)
Gross profit		2498380
Less:
Operating expenses		(1856800)
Net Income before taxes		641580
Taxes	641580*(40/100)	(256632)
Net Income		384948

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