Question

Baab Corporation is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:

Beginning Balance Ending Balance
Raw materials $14,350 $22,350
Work in process $27,350 $9,350
Finished Goods $62,350 $77,350

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 33,350 machine-hours and incur $256,795 in manufacturing overhead cost. The following transactions were recorded for the year: Raw materials were purchased, $315,350. Raw materials were requisitioned for use in production, $307,350 ($280,650 direct and $26,700 indirect). The following employee costs were incurred: direct labor, $377,350; indirect labor, $96,350; and administrative salaries, $172,350. Selling costs, $147,350. Factory utility costs, $10,350. Depreciation for the year was $148,000 of which $131,000 is related to factory operations and $17,000 is related to selling, general, and administrative activities. Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,070 machine-hours. Sales for the year totaled $1,267,000.

Required:

a. Prepare a schedule of cost of goods manufactured.
b. Was the overhead underapplied or overapplied? By how much?
c. Prepare an income statement for the year. The company closes any underapplied or overapplied overhead to Cost of Goods Sold.

Answer 1

A. $938,339

B. $2,061 Underapplied

C. $4,900

Step-by-step explanation:

a. Preparation of a schedule of cost of goods manufactured.

Baab Corporation

Schedule of Cost of Goods Manufactured

DIRECT MATERIAL

Opening 14,350

Add Purchased 315,350

Total Raw Material Available 329,700

Less: Closing Raw Material (22,350)

Less: Indirect Raw Material used in Production (26,700)

Raw Material used in production (A) 280,650

DIRECT LABOR (B) 377,350

FACTORY OVERHEAD APPLIED

($7.7*34070) (C ) 262,339

TOTAL MANUFACTURING COSTS (A+B+C) 920,339 (280,650+377,350+262,339)

Add Opening Work in Progress 27,350

Less: Closing Work in Progress (9,350)

Cost of goods manufactured 938,339

Calculation for Factory Overhead Recovery Rate using this formula

Factory Overhead Recovery Rate = Budgeted Factory Overhead/Machine Hours

Let plug in the formula

Factory Overhead Recovery Rate=256,795/33,350

Factory Overhead Recovery Rate= $ 7.70

2. Calculation for the overhead underapplied or overapplied

First step is to compute for Total Manufacturing Overhead

Computation of Manufacturing Overhead Incurred

Indirect Material 26,700

Indirect Labour 96,350

Factory Utilities Cost 10,350

Depreciation 131,000

Total Manufacturing Overhead 264,400

Second step is to Compute for Manufacturing Overhead Under or Over applied using this formula

Let plug in the formula

Manufacturing Overhead Under or Over applied = Actual Manufacturing Overhead Incurred - Manufacturing Overhead applied

Manufacturing Overhead Under or Over applied= 264,400 - 262,339

Manufacturing Overhead Under or Over applied= $2,061 Underapplied

3. Preparation of an income statement for the year.

Baab Corporation Income Statement

Sales 1,267,000

Add: Closing Finised Goods 77,350

Less: Opening Finished Goods (62,350)

Less: Selling & Administrative Expense:

Administrative Salaries 172,350

Depreciation relating to the selling, general & administrative activities 17,000

Selling Costs 147,350

Total Selling & Administrative Expense(336,700)

Less: Underapplied Overheads (2,061)

Less: Cost of Goods Manufactured (938,339 )

Profit/Loss $4,900