Question

Garcia, Inc. uses a job-order costing system for its products, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company applies manufacturing overhead using machine hours in the Machining Department and direct-labor cost in the Assembly Department. The following information relates to the year just ended:

	Machining Department			Assembly Department
Budgeted manufacturing overhead	$	4,000,000		$	3,024,000
Actual manufacturing overhead		4,260,000			3,040,000
Budgeted direct-labor cost (based on practical capacity)		1,500,000			5,600,000
Actual direct-labor cost		1,450,000			5,780,000
Budgeted machine hours (based on practical capacity)		400,000			100,000
Actual machine hours		425,000			110,000

The data that follow pertain to job no. 775, the only job in production at year-end.

	Machining Department			Assembly Department
Direct material	$	23,500		$	6,800
Direct labor	$	27,700		$	58,500
Machine hours		370			150

Selling and administrative expense amounted to $2,500,000.

1. Assuming the use of normal costing, determine the predetermined overhead rates used in the Machining Department and the Assembly Department.

Machining department ________ per machine hour

Assembly department _________ % of direct-labor cost

2. Compute the cost of the company’s year-end work-in-process inventory.

3. Determine whether overhead was under- or overapplied during the year in the Machining Department.

4. Determine whether overhead was under- or overapplied during the year in the Assembly Department.

5. If the company disposes of under- or overapplied overhead as an adjustment to Cost of Goods Sold, would the company’s Cost of Goods Sold account increase or decrease?

6. How much overhead would have been charged to the company’s Work-in-Process account during the year?

7. Comment on the appropriateness of the company’s cost drivers (i.e., the use of machine hours in Machining and direct-labor cost in Assembly).

Answer 1

1 Budgeted overhead rate Machining Department= Budgeted overheads/Budgeted machine hours 4000000/400000 $ 10.00 per machine hour Assembly Department= Budgeted overheads/Budgeted direct labour cost*100 = 3024000*100/5600000 54% 2 Work in process inventory Machining Direct material $ 23,500.00 Direct labour $ 27,700.00 Overheads(370*$10) $ 3,700.00 Total $ 54,900.00 Work in process inventory year end= Assembly Direct material $ 6,800.00 Direct labour $58,500.00 Overheads(58500*54%) $ 31,590.00 Total $ 96,890.00 54900+96890 $ 1,51,790.00 3 Budgeted overheads for machining depts Actual machine hours* Budgeted rate = 425000* 10 $ 42,50,000.00 Actual manufacturing overheads= $ 42,60,000.00 Under-applied overheads= 4260000-4250000 = $ 10,000.00 4 Budgeted overheads for assembly dept= Actual labour cost *Budgeted rate(%) = 5780000*54% $ 31,21,200.00 Actual manufacturing overheads= $ 30,40,000.00 Over-applied overheads= 3121200-3040000 $ 81,200.00

5 Increase in Cost of goods sold due to transfer of underapplied machining dept overheads= $10000 Decrease in Cost of goods sold due to transfer of overapplied assembly dept overheads= $81200 Net decrease in Cost of goods sold=81200-10000 $ 71,200.00 6 Overheads charged to Work in process account during the year= 4250000+3121200 = $ 73,71,200.00 Overheads in work in process at year end = 3700+31590 = $ 35,290.00 7 It is appropriate that machine hours is used to allocate the overheads in Machining department as it is heavily automated thus machine hours forms the basis of allocation. Also, it is appropriate that direct labour cost is used to allocate overheads in the Assembly department as it invloves a number of manual assembly activities and direct labour cost is the main cost of employing such labour personnel and thus it forms the basis of allocation.