Gitano Products operates a job-order costing system and applies overhead cost to

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 $132,000 of manufacturing overhead for an estimated allocation base of $88,000 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: $138,000 $ 84,000 Indirect labor Property taxes Depreciation of equipment Maintenance Insurance Rent, building $ 146,200 $8,600 $ 17,000 12,000 $ 10,800 $32,000 Beginning Ending Raw Materials Work in Process Finished Goods $ 29,000 18,000 $ 46,000 $37,000 $ 74,00060,000 Required 1. Compute the predetermined overhead rate for the year 2. Compute the amount of underapplied or overapplied overhead for the year 3. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials 4. Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied overhead in your answer 5. Assume that the $37,000 ending balance in Work in Process includes $8,600 of direct materials. Given this assumption, supply the information missing below:

Explanation / Answer

Solution:

Part 1 --- Calculation of Predetermined Overhead Rate

Predetermined Overhead Rate

- The manufacturing costs which cannot be directly traceable with the production department or product are called manufacturing overheads or indirect manufacturing costs.

- Manufacturing Overheads are the indirect costs incurred in production department during making the product. It includes all indirect costs related to the factory which are related to the production.

- Overheads are the indirect manufacturing costs incurred on the making of product. These costs are not directly traceable with the production volume because it incurred for a period or in lump sum amount.

- Generally, the overhead costs are applied to the production department on predetermined basis since these costs are not directly traceable with the production.

- Predetermined Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.

- Normally, it is calculated at the beginning of the period.

- It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).

- Allocation bases may be direct labor hours, direct labor costs, machine hours etc..

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base i.e. Direct materials used in production

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost $132,000 / Direct materials used in production $88,000 x 100

= 150% of Direct materials used

Part 2 --- Calculation of under or over applied overhead for the yera

Over or Under Applied Manufacturing Overhead

Since Manufacturing overheads are applied on estimation basis the actual manufacturing overheads may differ from applied overheads. The actual manufacturing overheads costs are known at the end of the period.

So, the different between actual manufacturing overhead costs and applied manufacturing overhead costs is called OVER OR UNDER APPLIED OVERHEAD.

If Applied Factory Overheads are less than the actual manufacturing overheads, the overheads are called under applied.

If Applied Factory Overheads are greater than the actual manufacturing overheads, the overheads are called over applied.

Predetermined Overhead Rate as calculated in part 1 = 150% of Direct materials used

Actual Direct materials used = beginning raw materials inventory + Raw materials purchase – Ending Raw materials inventory

= 29,000 + 138,000 – 18,000

= $149,000

Applied Manufacturing Overheads = Actual Direct materials used $149,000 x Overhead Rate 150%

= $223,500

Total Actual Manufacturing Overhead Costs incurred

Manufacturing Overhead Costs (Actual Incurred)

$$

Indirect labor

$146,200

Property taxes

$8,600

Depreciation of equipment

$17,000

Maintenance

$12,000

Insurance

$10,800

Rent, Building

$32,000

Total Manufacturing Overhead Costs incurred

$226,600

Here, applied overheads are lesser than actual overheads incurred, it means the overheads are UNDER APPLIED by $3,100 (226,600 – 223,500)

UNDER APPLIED OVERHEAD = $3,100

Part 3 --- Schedule of cost of goods manufactured for the year

Schedule of Cost of Goods Manufactured

$$

$$

Direct materials:

Beginning raw materials inventory

$29,000

Plus: Raw materials purchases

$138,000

Raw materials available for use

$167,000

Less: Ending raw materials inventory

$18,000

Direct materials used in production

$149,000

Direct Labor Costs

$84,000

Applied Manufacturing Overheads (Actual Direct materials used $149,000 * Overhead Rate 150%)

$223,500

Total Manufacturing Costs

$456,500

Plus: Beginning Inventory Work In Process

$46,000

Total cost of work in process

$502,500

Less: Ending Work in Process Inventory

$37,000

Cost of Goods Manufactured

$465,500

Part 4 ---

Unadjusted Cost of Goods Sold = Cost of Goods manufactured 465,500 + Beginning Finished Goods Inventory 74,000 – Ending Finished Goods Inventory 60,000

= $479,500

Part 5 – Missing information

$$

Direct materials

$8,600

Direct Labor (Balancing figure)

$15,500

Manufacturing overheads (Direct materials used 8,600*150%)

$12,900

Work in Process Inventory (given)

$37,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Manufacturing Overhead Costs (Actual Incurred)

$$

Indirect labor

$146,200

Property taxes

$8,600

Depreciation of equipment

$17,000

Maintenance

$12,000

Insurance

$10,800

Rent, Building

$32,000

Total Manufacturing Overhead Costs incurred

$226,600

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