PROBLEM 4–17 Applying Overhead; Underapplied or Overapplied Overhead; Income Sta
ID: 3030557 • Letter: P
Question
PROBLEM 4–17 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:
a.
Raw materials requisitioned for use in production, $40,000 (80% direct and 20% indirect).
b.
Page 148
Factory utility costs incurred, $14,600.
c.
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.
d.
Costs for salaries and wages were incurred as follows:
e.
Insurance costs incurred, $3,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).
f.
Miscellaneous selling and administrative expenses incurred, $18,000. g. Manufacturing overhead was applied to production. The company applies overhead on the basis of 150% of direct labor cost.
g.
Goods that cost $130,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.
h.
Goods that had cost $120,000 to manufacture according to their job cost sheets were sold for $200,000.
Required:
1.
Determine the underapplied or overapplied overhead for the year.
2.
Prepare an income statement for the year. (Hint: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead.)
a.
Raw materials requisitioned for use in production, $40,000 (80% direct and 20% indirect).
b.
Page 148
Factory utility costs incurred, $14,600.
c.
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.
d.
Costs for salaries and wages were incurred as follows:
e.
Insurance costs incurred, $3,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).
f.
Miscellaneous selling and administrative expenses incurred, $18,000. g. Manufacturing overhead was applied to production. The company applies overhead on the basis of 150% of direct labor cost.
g.
Goods that cost $130,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.
h.
Goods that had cost $120,000 to manufacture according to their job cost sheets were sold for $200,000.
Explanation / Answer
Solution 1 :
Overhead Cost Indirect Raw Material $ 8,000.00
Indirect Labor $ 18,000.00
Factory Utilities $ 14,600.00
Depreciation $ 21,000.00
Insurance Cost $ 2,400.00
Total actual overheads cost $ 64,000.00
Applied Overheads = 150% of Direct Labor Cost = 150% * $40000 = $60000
Under Applied Overheads = $64000 - $60000 = $4000
Solution 2 :
Income Statement Sale $ 200,000.00 Less: Cost of goods sold before under applied adjustment $ (120,000.00) Less: Adjustment for under applied overheads Gross Profit $ 76,000.00 Less: Operating Expenses (non-manufacturing expenses) Selling, General and administrative Sales commission $ (10,000.00) Miscellaneous selling and administrative $ (18,000.00) Depreciation $ (7,000.00) Administrative salaries $ (25,000.00) Operating profits $ 16,000.00
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