Question

Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:    

Computer-hours		82,000
Fixed manufacturing overhead cost	$	1,274,000
Variable manufacturing overhead per computer-hour	$	3.80

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

   

Computer-hours		50,000
Manufacturing overhead cost	$	1,025,000
Inventories at year-end:
Raw materials	$	430,000
Work in process	$	190,000
Finished goods	$	1,020,000
Cost of goods sold	$	2,720,000

Required:  

1. Compute the company’s predetermined overhead rate for the year. (Round predetermined overhead rate to 2 decimal places.)

Overhead rate ______ per computer hour

2. Compute the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.)

3. Determine the cost of goods sold for the year after any adjustment for underapplied or overapplied overhead. (Round predetermined overhead rate to 2 decimal places.)

Answer 1

1) Overhead rate = (1274000/82000+3.80) = 19.34 per computer hour

2) Applied overhead = 19.34*50000 = 967000

Actual overhead = 1025000

Under applied overhead = 1025000-967000 = 58000

3) Cost of goods sold = 2720000+58000 = 2778000