PROBLEM 2-7. Underapplied or Overapplied Overhead [LO 5] In the past year, Oak C

Question

PROBLEM 2-7. Underapplied or Overapplied Overhead [LO 5] In the past year, Oak Crafters Cabinets had total revenue of $2,500,000, cost of goods sold of $1,000,000 (before adjustment for over- or underapplied overhead), administrative expenses of $600,000, and selling expenses of $400,000. During the year, overhead was applied using a predetermined rate of 75 percent of direct labor cost. Actual direct labor was $700,000. Actual overhead was $450,000. The ending balances in the inventory accounts (prior to adjustment for overapplied overhead) are: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory $32,000 80,000 48,000 REQUIRED a. Calculate net income treating the amount of overrapplied overhead as immaterial and assigning it to Cost of Goods Sold. b. Calculate net income treating the amount of overapplied overhead as material and apportioning it to the appropriate inventory accounts and Cost of Goods Sold. Round proportions to 3 decimal places. Round adjustments to the nearest whole dollar. c. Discuss the impact of the alternative treatments.

Explanation / Answer

A. Particulars in $ Total Revenue        25,00,000 Less: Cost of goods sold           9,25,000 (1000000-75000) Gross Profit        15,75,000 Less: Administrative expenses           6,00,000 Selling expenses           4,00,000 Net Income           5,75,000 Journal Entry Particulars Debit Credit Manufacturing overhead A/c……………….Dr              75,000 (525000-450000) To Cost of goods Sold A/c 75000 Working Direct Labour cost 700000 Overhead applied at 75% 525000 Actual Overhead cost 450000 Over application of overhead rate 75000 B Allocation of Overhead applied rate WIP Inventory              80,000 39.408867 FG Inventory              48,000 23.64532 Cost of goods sold              75,000 36.945813           2,03,000 100 Journal Entry Particulars Debit Credit Manufacturing overhead A/c……………….Dr              75,000 To WIP Inventory 29,556.65 to FG inventory 17,733.99 To COGS 27,709.36

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