Question

1) Orpa Company produces non-motorized boats. Orpa uses a normal costing system and allocates manufacturing overhead costs using direct labor cost. The following data is for 2020:

Budgeted manufacturing overhead cost	$157,500
Budgeted direct manufacturing labor cost	$225,000
Actual manufacturing overhead cost	$172,000
Actual direct manufacturing labor cost	$250,000

 

 Inventory balances on December 31, 2020 were: 

Account	Ending Balance	2020 Direct Labor Hours used in ending balance
Work in Process	$70,000	3,000
Finished Goods	$235,000	7,500
Cost of Goods Sold	$495,000	14,500

*Wage rate for the year was $10 per hour

 

Instructions:

i. Calculate the overhead allocation rate. 

ii. Compute the amount of under or overallocated overhead. 

iii. Calculate the ending balances in work-in-process, finished goods and cost of goods sold if under or overallocated overhead is prorated based on overhead allocated in 2020 in the ending balances (before proration) in each of the three accounts. 

iv. Journalize the adjusting entry to close the balance of under or overallocated overhead. 

Answer 1

i) Overhead allocation rate = Budgeted Manufacturing Overhead / Budgeted Direct Manufacturing Labor Cost
= $157500 / 225000 = 70% of Direct Labor cost

ii) Overhead applied = Actual Direct Labor Cost x Overhead rate
= $250000 x 70% = $175,000

Since overhead applied is higher than overhead incurred, so overhead is overapplied.

Over-applied Overhead = Overhead applied - Actual Overhead
= $175000 - 172000 = $3,000

iii)

Account	Account Balance (Before Proration)	Proration	Account Balance (After Proration)
Work in Process	$          70,000	$                  360	$            69,640
Finished Goods	$        235,000	$                  900	$          234,100
Cost of Goods Sold	$        495,000	$               1,740	$          493,260
Totals	$        800,000	$               3,000	$         797,000

iv)

Account Titles	Debit	Credit
Manufacturing Overhead	$            3,000
Work in Process Inventory		$               360	=3000/25000*3000
Finished Goods Inventory		$               900	=3000/25000*7500
Cost of Goods Sold		$            1,740	=3000/25000*14500
(To close Over applied overhead)

To close over-applied manufacturing overhead is debited and work in process, finished goods and cost of goods sold is credited proportionately using direct labor cost.

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