Question

Reynolds Manufacturers Inc. has estimated total factory overhead costs of $95,000 and expected direct labor hours of 9,500 for the current fiscal year. If job number 117 incurred 2,300 direct labor hours, Work in Process will be debited and Factory Overhead will be credited for

• $2,300
• $21,850
• $23,000
• $95,000

Answer 1

Concepts and reason

Job order costing: It is a method of cost accounting, in which cost is collected and accumulated for each job, work order, or project separately. Especially the job order costing is followed in organizations where customized goods are produced. The costs of goods manufactured incurred in each job, or project, work order are determined in the Cost of Good Manufactured Schedule.

Cost of Goods Manufactured Schedule: The cost of goods manufactured is calculated in a statement. For the calculation of cost of goods manufactured it takes the beginning and ending work in process, direct materials, direct labour, and manufacturing overhead into consideration.

Direct materials cost: Direct materials cost is the cost of prime raw materials which are directly related or identified with the goods produced. For example, the cost of plastic component is identified as direct materials cost in the production of plastic bottle.

Direct labor cost: The costs that are related to the labor employed in manufacturing process are known as direct labor costs. The direct labor costs includes not only wages of employees, but also worker’s compensation, life and medical insurance, payroll taxes, training costs, and pension contributions.

Fundamentals

Predetermined overhead rate: The cost accountants estimate a rate for all the overhead costs to compute manufacturing overhead. That allocation rate which is estimated to apply to overhead cost, based on the ratio of total estimated overhead costs to total estimated quantity, is known as predetermined overhead rate.

The formula to calculate predetermined overhead rate is shown below:

Factory overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs. Some examples are insurance cost related to factory operations, depreciation incurred on factory equipment, electricity of the equipment, rent of the plant, and compensation of plant managers. The flowing is the formula to calculate factory or manufacturing overhead:

Compute the predetermined overhead rate as shown below:

Therefore, predetermined overhead rate is $10 per direct labor hour.

Compute factory overhead value that should be credited as shown below:

Therefore, factory overhead will be credited for $23,000.

Ans:

Work-in-process will be debited and Factory overhead will be credited for $23,000.