Dillon Products manufactures various machined parts to customer specifications.

Question

Dillon Products manufactures various machined parts to customer specifications. The company uses a job-order costing system and applies overhead cost to jobs on the basis of machine-hours. At the beginning of the year, the company used a cost formula to estimate that it would incur $4,173,600 in manufacturing overhead cost at an activity level of 564,000 machine-hours. The company spent the entire month of January working on a large order for 12,100 custom-made machined parts. The company had no work in process at the beginning of January. Cost data relating to January follow: a. Raw materials purchased on account, $320,000 b, Raw materials used in production, $260,000 (80% direct materials and 20% indirect materials). c. Labor cost accrued in the factory, $180,000 (one-third direct labor and two-thirds indirect labor) d. Depreciation recorded on factory equipment, $63,900. e. Other manufacturing overhead costs incurred on account, $85,800 f. Manufacturing overhead cost was applied to production on the basis of 40,940 machine-hours actually worked during the month g. The completed job for 12,100 custom-made machined parts was moved into the finished goods warehouse on January 31 to await delivery to the customer. In computing the dollar amount for this entry, remember that the cost of a completed job consists of direct materials, direct labor, and applied overhead.) Required 1. Prepare journal entries to record items (a) through (f above [ignore item (g) for the moment. 2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant items from your journal entries to these T- accounts 3. Prepare a journal entry for item (g) above 4. If 10,100 of the custom-made machined parts are shipped to the customer in February, how much of this job's cost will be included in cost of goods sold for February?

Explanation / Answer

Solution:

Part 1 – Journal Entries from a to f

Event

General Journal

Debit

Credit

a)

Raw materials

$320,000

Accounts Payable

$320,000

b)

Work in Process Inventory (Direct materials 260,000*80%)

$208,000

Manufacturing Overhead (indirect material 260,000*20%)

$52,000

   Raw materials

$260,000

c)

Work in Process Inventory (Direct labor 180,000*1/3)

$60,000

Manufacturing Overhead (indirect labor 180,000*2/3)

$120,000

Wages Payable

$57,000

d)

Manufacturing Overhead

$63,900

Accumulated Depreciation

$63,900

e)

Manufacturing Overhead

$85,800

Accounts Payable

$85,800

f)

Work in Process Inventory (Refer Note 1)

$302,956

Manufacturing Overhead

$302,956

Note 1 --- Applied Manufacturing Overhead to production

Actual Hours Worked = 40,940 MHs

Overhead Allocation Rate = Total Estimated Manufacturing overhead $4,173,600 / Total Estimated machine hours 564,000

= $7.40 per machine hour

Applied Manufacturing Overhead to production = Actual MHs worked 40,940 x Overhead Rate $7.40

= $302,956

Part 2 --- T-Accounts

Manufacturing Overhead

Indirect materials

$52,000

$302,956

Work In Process (Overhead Applied)

Indirect labor

$120,000

Depreciation

$63,900

Other OH

$85,800

Ending Bal.

$18,744

Work in Process

Direct materials

$208,000

$570,956

Finished Goods

Direct labor

$60,000

Applied Manufacturing OH

$302,956

Ending Balance

$0

Part 3 --

Event

General Journal

Debit

Credit

g)

Finished Goods Inventory

$570,956

Work In Process Inventory

$570,956

Part 4 –

Portion of Job Cost included in Cost of Goods Sold (before under applied overhead adjustment) = $570,956

Portion of Job Cost included in Cost of Goods Sold (after under applied overhead adjustment) = $570,956 + $18,744 = $589,700

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Event

General Journal

Debit

Credit

a)

Raw materials

$320,000

Accounts Payable

$320,000

b)

Work in Process Inventory (Direct materials 260,000*80%)

$208,000

Manufacturing Overhead (indirect material 260,000*20%)

$52,000

   Raw materials

$260,000

c)

Work in Process Inventory (Direct labor 180,000*1/3)

$60,000

Manufacturing Overhead (indirect labor 180,000*2/3)

$120,000

Wages Payable

$57,000

d)

Manufacturing Overhead

$63,900

Accumulated Depreciation

$63,900

e)

Manufacturing Overhead

$85,800

Accounts Payable

$85,800

f)

Work in Process Inventory (Refer Note 1)

$302,956

Manufacturing Overhead

$302,956

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