Question

Kody Corporation uses a job-order costing system with a plantwide overhead rate based on machine-hours. At the beginning of the year, the company made the following estimates:

Machine-hours required to support estimated production		157,000
Fixed manufacturing overhead cost	$	653,000
Variable manufacturing overhead cost per machine-hour	$	4.20

Required:

1. Compute the predetermined overhead rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

     

   

2. During the year Job 500 was started and completed. The following information was available with respect to this job:

Direct materials requisitioned	$	380
Direct labor cost	$	250
Machine-hours used		33

Compute the total manufacturing cost assigned to Job 500. (Round your intermediate calculations and final answer to 2 decimal places.)

     

  

3-a. During the year the company worked a total of 145,400 machine-hours on all jobs and incurred actual manufacturing overhead costs of $1,218,044. What is the amount of underapplied or overapplied overhead for the year? (Round your intermediate calculations to 2 decimal places.)

       

3-b. If this amount were closed out entirely to Cost of Goods Sold, would net operating income increase or decrease?

      

• Increase

• Decrease

Answer 1

1.
Predetermined overhead rate = ( Estimated fixed manufacturing overhead cost / Estimated machine hours ) + Variable manufacturing overhead cost per machine hour = ( 653000 / 157000 ) + 4.20	8.36

2.
	Job 500
Direct materials requisitioned	380
Direct labor cost	250
Overhead applied ( 33 * 8.36 )	275.88
Total manufacturing cost assigned	905.88

3-a.
Manufacturing overhead applied = Total actual machine hours * Predetermined overhead rate = 145400 * 8.36	1215544
Actual manufacturing overhead incurred	1218044
As the overhead applied are less than the actual overhead, the overhead is underapplied
Underapplied overhead = Actual overhead - Overhead applied = 1218044 - 1215544	2500

3-b.

Answer : Decrease

Explanation : If the underapplied overhead is closed to cost of goods sold, the amount of cost of goods sold will increase and hence the net operating income will decrease.