Question

Predetermined Overhead Rates, Variances, Cost Flows

Barrymore Costume Company, located in New York City, sews costumes for plays and musicals. Barrymore considers itself primarily a service firm, as it never produces costumes without a preexisting order and only purchases materials to the specifications of the particular job. Any finished goods ending inventory is temporary and is zeroed out as soon as the show producer pays for the order. Overhead is applied on the basis of direct labor cost. During the first quarter of the year, the following activity took place in each of the accounts listed:

Work In Process
Bal.	17,000	Complete	245,000
DL	80,000
OH	140,000
DM	40,000
Bal.	32,000

Finished Goods
Bal.	40,000	Sold	210,000
Complete	245,000
Bal.	75,000

Overhead
	138,500		140,000
		Bal.	1,500

Cost of Goods Sold
	210,000

Job 32 was the only job in process at the end of the first quarter. A total of 1,000 direct labor hours at $10 per hour were charged to Job 32.

	Required:
1.	Assuming that overhead is applied on the basis of direct labor cost, what was the overhead rate used during the first quarter of the year?
2.	What was the applied overhead for the first quarter? The actual overhead? The under- or overapplied overhead?
3.	What was the cost of the goods manufactured for the quarter?
4.	Assume that the overhead variance is closed to the cost of goods sold account. Prepare the journal entry to close out the overhead control account on March 31. Refer to the Chart of Accounts for account titles. What is the adjusted balance in Cost of Goods Sold?
5.	For Job 32, identify the costs incurred for direct materials, direct labor, and overhead.

1. Assuming that overhead is applied on the basis of direct labor cost, what was the overhead rate used during the first quarter of the year?

The overhead rate used during the first quarter of the year is  of direct labor cost.

4(a) Assume that the overhead variance is closed to the cost of goods sold account. Prepare the journal entry to close out the overhead control account on March 31. Refer to the Chart of Accounts for the exact wording of account titles.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT	POST. REF.	DEBIT	CREDIT
1
2

CHART OF ACCOUNTS
Barrymore Costume Company
General Ledger
ASSETS 110 Cash 120 Accounts Receivable 131 Supplies 132 Prepaid Insurance 141 Raw Materials 142 Work in Process 143 Overhead Control 144 Finished Goods 170 Land 180 Equipment 181 Accumulated Depreciation LIABILITIES 210 Accounts Payable 220 Wages Payable 230 Utilities Payable 240 Lease Payable EQUITY 310 Common Stock 320 Retained Earnings	REVENUE 410 Sales EXPENSES 510 Cost of Goods Sold 520 Insurance Expense 530 Wages Expense 540 Supplies Expense 550 Utilities Expense 560 Depreciation Expense 590 Miscellaneous Expense

4(b) What is the adjusted balance in Cost of Goods Sold?

The adjusted balance in Cost of Goods Sold is .

5. For Job 32, identify the costs incurred for direct materials, direct labor, and overhead. Determine the ending Work in Process amount.

Job 32

1	Direct labor
2	Overhead applied
3	Direct materials
4	Ending work in process

Answer 1

1)	Overhead Rate		=	OH applied / DL
			=	$ 140000 / $ 80000
			=	175%	or 1.75

2)	Applied OH		=	$ 1,40,000.00
	Actual OH		=	$ 1,38,500.00
	Overapplied OH		=	$      1,500.00

3)

Cost of Goods Manu.

=

$ 2,45,000.00

4.a)
	Journal Entry
	Date	Particulars			Debit	Credit
		OH Control Account			$ 1,500.00
		To Cost of Goods sold				$ 1,500.00

4.b)	Adjusted balance in Cost of Goods sold				=	$ 210000 - $ 1500
					=	$ 2,08,500.00

5)	Direct Labor Cost			=	$ 10,000.00
	Overhead applied			=	$ 17,500.00
	Direct Material			=	$   4,500.00
	Ending WIP			=	$ 32,000.00
	Workings
	Total cost of Job 32			=	$ 32,000.00
	Direct Labor Cost			=	$ 10,000.00	(1000 hours x $ 10)
	Overhead applied			=	$ 17,500.00	($ 10000 x 175%)
	Direct Material			=	$   4,500.00	($ 32000 - $ 10000 - $ 17500)