Applying Overhead; Underapplied or Overapplied Overhead; Income Statement [LO 4-

Question

Applying Overhead; Underapplied or Overapplied Overhead; Income Statement [LO 4-2, LO 4-4, LO 4-5] Durham Company uses a job-order costing system. The following transactions took place last year: Raw materials requisitioned for use in production, $40,000 (80% direct and 20% indirect). Factory utility costs incurred, $14,600. Depreciation recorded on plant and equipment, $28,000. Three-fourths of the depreciation relates to factory equipment, and the remainder relates to selling and administrative equipment. Costs for salaries and wages were incurred as follows: Insurance costs incurred, $3,000 (80% relates to factory operations, and 20% relates to selling and administrative activities). Miscellaneous selling and administrative expenses incurred, $18,000. Manufacturing overhead was applied to production. The company applies overhead on the basis of 150% of direct labor cost. Goods that cost $130,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse. Goods that had cost $120,000 to manufacture according to their job cost sheets were sold for $200,000. Required: Determine the underapplied or overapplied overhead for the year. Prepare an income statement for the year.

Explanation / Answer

Manufacturing overhead (also referred to as factory overhead, factory burden, and manufacturing support costs) refers to indirect factory-related costs that are incurred when a product is manufactured.

We calculate the overheads

Manufacturing Overhead of Durham Company

Selling, Administrative and Distribution Overhead of Durham Company

Step 2

We compare the overheads and find out whether there has been an underapplication or over application
of overheads

Applied overhead < Actual Overhead

Therefore Manufacturing overhead have been under applied.

Manufacturing Overhead Credit 4000

  

                                           (4,000.00)

Theory highlight before the practical solution

Manufacturing overhead (also referred to as factory overhead, factory burden, and manufacturing support costs) refers to indirect factory-related costs that are incurred when a product is manufactured.

They include indirect costs such as accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities etc Practical Solution Step 1

We calculate the overheads

Manufacturing Overhead of Durham Company

Cost Head Amount($) Method Notes Indirect material        8,000.00 20% of Raw materials) Indirect materials is a part
of Manufacturing overhead Factory Utility cost      14,600.00 Given in the Problem Depreciation      21,000.00 3/4th for Factory
Equipment Depreciation related to factory
will be taken in manufacturing
overhead Indirect Labour      18,000.00 Given in the Problem Insurance        2,400.00 80% for Factory Operations Insurance related to factory
will be taken in manufacturing
overhead Total 64,000

Selling, Administrative and Distribution Overhead of Durham Company

Cost Head Amount($) Method Notes Depreciation        7,000.00 1/4th for Factory
Equipment The left over part from the above Sales Commissions      10,000.00 Given in the Problem Administrative Salaries      25,000.00 Given in the Problem Insurance            600.00 20% for Selling overhead The left over part from the above Misc Selling & Admin Exp      18,000.00 Given in the Problem Total      60,600.00

Step 2

We compare the overheads and find out whether there has been an underapplication or over application
of overheads

Formulae Over Applied manufacturing overhead Applied overhead > Actual Overhead Under Applied manufacturing overhead

Applied overhead < Actual Overhead

Actual Overhead as per above calculation                                            64,000.00 Actual Overhead Manufacturing overhead applied in Durham company                                            60,000.00 Applied Overhead ( 150% of Direct labour Cost, i.e $40,000)

Therefore Manufacturing overhead have been under applied.

Step 3 Ratio for journal entry Total 250,000 ( 130,000 + 120,000) Finished goods 0.52 ( 130,000/ 250,000) Cost of Goods sold 0.48 ( 120,000/ 250,000) Journal Entry Note Finished Goods Debit 2080 ( 4000 X .52) Cost of Goods Sold Debit 1920 ( 4000 X .48)

Manufacturing Overhead Credit 4000

Step 4 Income Statement Cost Head Amount($) Method Sale 200,000.00 Given in problem Cost of Goods sold 120,000.00 Given in problem Gross Profit      80,000.00 Less Selling Overhead      60,600.00 as calculated in step 1 Net Profit      19,400.00

  

                                           (4,000.00)

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