ACCT 1B HQ Ch 3

Is Manufacturing Overhead underapplied or overapplied for the year?

overapplied 1 Manufacturing overhead 7,000 Cost of goods sold 7,000

Prepare journal entries to record the transactions for the year.

1 a. Raw materials 275,000 Accounts payable 275,000 2 b. Work in process 220,000 Manufacturing overhead 60,000 Raw materials 280,000 3 c. Work in process 180,000 Manufacturing overhead 72,000 Sales commisions expense 63,000 Administrative salaries expense 90,000 Salaries and wages payable 405,000 4 d. Manufacturing overhead 13,000 Rent expense 5,000 Accounts payable 18,000 5 e. Manufacturing overhead 57,000 Accounts payable 57,000 6 f. Advertising expense 140,000 Accounts payable 140,000 7 g. Manufacturing overhead 88,000 Depreciation expense 12,000 Accumulated depreciation 100,000 8 h. Work in process 297,000 Manufacturing overhead 297,000 9 i. Finished goods 675,000 Work in process 675,000 10 j(1). Cash 1,250,000 Sales 1,250,000 11 j(2). Cost of goods sold 700,000 Finished goods 700,000

Compute the amount of underapplied or overapplied overhead for the year.

Before the underapplied or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year. Beginning raw materials inventory $ 20,000 Add: Purchases of raw materials 510,000 Total raw materials available 530,000 Deduct: Ending raw materials inventory 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 Manufacturing overhead applied to work in process $450,000 × 160% 720,000 Underapplied overhead $ 40,000

Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

COGS 130000 MOH 130000

How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

Comparing the two methods: Cost of goods sold if the underapplied overhead is closed to cost of goods sold ($1,400,000 + $130,000) $ 1,530,000 Cost of goods sold if the underapplied overhead is closed to Work in Process, Finished Goods, and Cost of Goods Sold ($1,400,000 + $91,000) 1,491,000 Difference in cost of goods sold $ 39,000

Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.

Direct materials: Beginning raw materials inventory $20,000 Add: Purchases of raw materials 510,000 Total raw materials available 530,000 Less: Ending raw materials inventory 80,000 Raw materials used in production $450,000 Direct labor 90,000 Manufacturing overhead applied to work in process 720,000 Total manufacturing cost 1,260,000 Add: Beginning work in process inventory 150,000 1,410,000 Less: Ending work in process inventory 70,000 Cost of goods manufactured $1,340,000

Prepare an income statement for the year. (All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.)

Gold Nest Company Income Statement For the Year Ended Sales $1,250,000 Cost of goods sold 693,000 Gross margin 557,000 Selling and administrative expenses: Sales commissions 63,000 Administrative salaries expense 90,000 Rent expense 5,000 Advertising expense 140,000 Depreciation expense 12,000 310,000 Net operating income $247,000

Superior Company provided the following data for the year ended December 31 (all raw materials are used in production as direct materials): Selling expenses $ 140,000 Purchases of raw materials $ 290,000 Direct labor ? Administrative expenses $ 100,000 Manufacturing overhead applied to work in process $ 285,000 Actual manufacturing overhead cost $ 270,000 Inventory balances at the beginning and end of the year were as follows: Beginning of Year End of Year Raw materials $ 40,000 $ 10,000 Work in process ? $ 35,000 Finished goods $ 50,000 ? The total manufacturing costs for the year were $683,000; the cost of goods available for sale totaled $740,000; the unadjusted cost of goods sold totaled $660,000; and the net operating income was $30,000. The company's underapplied or overapplied overhead is closed to Cost of Goods Sold. Required: Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement.

Superior Company Income Statement Sales $915,000 Cost of goods sold 645,000 Gross margin 270,000 Selling and administrative expenses: Selling expenses $140,000 Administrative expenses 100,000 240,000 Net operating income $30,000 Superior Company Schedule of Cost of Goods Sold Beginning finished goods inventory $50,000 Add: Cost of goods manufactured 690,000 Cost of goods available for sale 740,000 Less: Ending finished goods inventory 80,000 Unadjusted cost of goods sold 660,000 Less: Overapplied overhead 15,000 Adjusted cost of goods sold $645,000 Superior Company Schedule of Cost Goods Manufactured Direct materials: Beginning raw materials inventory $40,000 Add: Purchases of raw materials 290,000 Total raw materials available 330,000 Less: Ending raw materials inventory 10,000 Raw materials used in production $320,000 Direct labor 78,000 Manufacturing overhead applied to work in process 285,000 Total manufacturing costs 683,000 Add: Beginning work in process inventory 42,000 725,000 Less: Ending work in process inventory 35,000 Cost of goods manufactured $690,000 Schedule of cost of goods sold: Less: Overapplied overhead ($270,000 - $285,000) = $15,000 Income statement: Cost of goods sold ($660,000 - $15,000) = $645,000

Assume that the $70,000 ending balance in Work in Process includes $24,000 of direct materials. Given this assumption, supply the information missing below:

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

Compute the predetermined overhead rate for the year.

The predetermined overhead rate is computed as follows: Predetermined overhead rate = Estimated total manufacturing overhead cost/ Estimated total amount of the allocation base = $800,000/$500,000 = 160%

Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.

The underapplied overhead would be allocated using the following percentages: Overhead applied during the year in: Work in process $ 36,000 5% Finished goods 180,000 25% Cost of goods sold 504,000 70% Total $ 720,000 100% The entry to record the allocation of the underapplied overhead would be: Work in process: (5% × $130,000) = $6,500 Finished goods: (25% × $130,000) = $32,500 Cost of goods sold: (70% × $130,000) = $91,000

Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied overhead in your answer.

Unadjusted cost of goods sold: Beginning finished goods inventory $ 260,000 Add: Cost of goods manufactured 1,340,000 Cost of goods available for sale 1,600,000 Deduct: Ending finished goods inventory 400,000 Unadjusted cost of goods sold $ 1,200,000 The underapplied overhead can either be closed out to Cost of Goods Sold or allocated between Work in Process, Finished Goods, and Cost of Goods Sold based on the overhead applied during the year in the ending balance in each of these accounts.

Compute the underapplied or overapplied overhead.

the predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) $ 900,000 Estimated total machine-hours (b) 75,000 hours Predetermined overhead rate (a) ÷ (b) $ 12.00 per hour Actual manufacturing overhead cost $ 850,000 Manufacturing overhead applied to work in process during the year: 60,000 actual MHs × $12 per MH 720,000 Underapplied overhead cost $ 130,000