Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $800,000 of manufacturing overhead for an estimated allocation base of $500,000 direct material dollars to be used in production The company has provided the following data for the just completed year: Purchase of raw materials Direct labor cost Manufacturing overhead costs: $510,00e 串90,000 Indirect labor Property taxes Depreciation of equipment Maintenance Insurance Rent, building $170,00e $ 48,00e $260,00e $ 95,eee $ 7,000 Beginning Ending $ 20,000 $ 80,e00 Work in Process $15e,000 $ 70,000 Finished Goods$260,000 $400,000 Raw Materials

Answer 1

1.

Predetermined Over head Rate=Estimated total manufacturing overhead cost / Estimated total amount of the allocation base

$800,000 / $500,000 direct materials cost= 160%

2.

Before the underapplied or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year.

Raw materials inventory, beginning .................... $ 20,000

Add, Purchases of raw materials......................... 510,000

Raw materials available ..................................... 530,000

Deduct: Raw materials inventory, ending ............ 80,000

Raw materials used in production ................... $450,000

Actual manufacturing overhead costs:

Indirect labor ................................................. $170,000

Property taxes................................................ 48,000

Depreciation of equipment .............................. 260,000

Maintenance .................................................. 95,000

Insurance ...................................................... 7,000

Rent, building ................................................ 180,000

Total actual costs...........................................760,000

Applied manufacturing overhead costs:

$450,000 × 160% .......................................... 720,000

Underapplied overhead...................................... $ 40,000

3.

Gitano Products Schedule of Cost of Goods Manufactured Direct materials:

Raw materials inventory, beginning .............. $ 20,000

Add purchases of raw materials.................... 510,000

Total raw materials available........................ 530,000

Deduct raw materials inventory, ending ........ 80,000

Raw materials used in production ................................ $ 450,000

Direct labor..........................................................................90,000

Manufacturing overhead applied to work in process....... 720,000

Total manufacturing costs .............................. ...............1,260,000

Add: Work in process, beginning......................................150,000

1,410,000

Deduct: Work in process, ending .................... ...................70,000

Cost of goods manufactured.........................................$1,340,000

4.

Cost of goods sold:

Finished goods inventory, beginning ................. $ 260,000

Add: Cost of goods manufactured..................... 1,340,000

Goods available for sale................................... 1,600,000

Deduct: Finished goods inventory, ending ......... 400,000

Cost of goods sold........................................... $1,200,000

5.

Direct materials................................................. $ 8,500

Direct labor....................................................... .......2,700

Overhead applied ($8,500 × 160%) .................... ..13,600

Total manufacturing cost.................................... $24,800

$24,800 × 125% = $31,000 price to the customer

The amount of overhead cost in Work in Process was:

$24,000 direct materials cost × 160% = $38,400

The amount of direct labor cost in Work in Process is:

Total ending work in process................................ $70,000

Deduct: Direct materials.................... $24,000

Manufacturing overhead........ .............38,400 62,400

Direct labor cost .................................................$ 7,600

The completed schedule of costs in Work in Process was:

Direct materials ................................. $24,000

Direct labor ........................................... 7,600

Manufacturing overhead.......................38,400

Work in process inventory................... $70,000