Sim lon tu Ly-29 Question 4) in the past year, Eagle Custom Cabinets had total r

Question

Sim lon tu Ly-29 Question 4) in the past year, Eagle Custom Cabinets had total revenue of $1,020,000, cost of goods sold of $660,000 (before adjustment for over- or under-applied overhead), administrative expenses of $270,000, and selling expenses of S110,000. During the year, overhead was applied using a predetermined rate of 55 percent of direct labor cost. Actual direct labor was $440.000. Actual overhead was $277,000. The ending balances in the inventory accounts (prior to adjustment for over- or under-applied overhead) are: Raw Materials Inventory Work in Process inventory Finished Goods inventory 44,000 are often ing our and result in te the cost 30.000 60,000 Required (round out to 3 decimal places when doing prorate %s & no decimal places for final answers) 1) What are the balances in RM, WIP, FG, & COGS if we assume the over- or under-applied overhead is immaterial? 2) What are the balances in RM. WIP, FG, COGS if we assume the over- or under-applied overhead is material? ED 3) Assume that of the $440,000 of actual direct labor, the folowing was in the ending balances of the related accounts: Raw Materials S0: WIP $14.400; & FG $44,800. What are the balances in RM, WIP, FG, & COGS if we assume the over-or under-applied overhead is material and prorated based on overhead allocated during the year? m that otive parts nd purchas based cost times of thou 4) Calculate operating income (or loss) under each of the three scenarios above (show a mini income statement for each). mou 3 n 2005 on Each yea ing analyses s by morae

Explanation / Answer

1) When the underapplied or overapplied OH is immaterial it is closed to COGS. Hence, the inventory balances would be unaffected. It would be: Raw material inventory 44000 Work in process inventory 30000 Finished goods inventory 60000 The balance in COGS would be: Unadjusted COGS balance 660000 Add: Underapplied overhead = 277000 - 440000*55% = 35000 Adjusted COGS balance 695000 2) If the underapplied OH is material it is prorated to COGS, FG, WIP in the ratio of the cost of the inventory balance. The % proration would be 35000/(30000+60000+660000) = 4.6667% The balances would be: Raw material inventory 44000 Work in process inventory = 30000*1.04667 = 31400 Finished goods inventory = 60000*1.04667 = 62800 COGS = 660000*1.046667 = 690800 3) If the underapplied OH is material it is prorated to COGS, FG, WIP in the ratio of the the overhead assigned to/remaining in them. The % proration would be 35000/440000 = 7.9545% The balances would be: Raw material inventory 44000 Work in process inventory = 30000+14400*0.079545 = 31145 Finished goods inventory = 60000+44800*0.079545 = 63564 COGS = 660000+(440000-14400-44800)*0.079545 = 690291 4) MINI INCOME STATEMENT: For Case - 1: Sales 1020000 COGS 695000 Gross income 325000 Less: Selling and administrative expenses: Selling expenses 110000 Administrative expenses 270000 Total selling and administrative expenses 380000 Operating loss -55000 For Case - 2: Sales 1020000 COGS 690800 Gross income 329200 Less: Selling and administrative expenses: Selling expenses 110000 Administrative expenses 270000 Total selling and administrative expenses 380000 Operating loss -50800 For Case - 3: Sales 1020000 COGS 690291 Gross income 329709 Less: Selling and administrative expenses: Selling expenses 110000 Administrative expenses 270000 Total selling and administrative expenses 380000 Operating loss -50291

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