Question

Ravsten Company uses a job-order costing system. On January 1, the beginning of the current year, the company's inventory balances were as follows: Raw Materials .... ....... Work in Process ..................... Finished Goods ........................ $16,000 $10,000 $30,000 The company applies overhead cost to jobs on the basis of machine-hours. For the current year, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions were recorded for the year: a. Raw materials were purchased on account: $200,000. b. Raw materials were requisitioned for use in production: $190,000 (80% direct and 20% indirect). c. The following costs were incurred for employee services: Direct labour ......................... Indirect labour ........................ Sales commissions ..................... Administrative salaries.................. $160,000 $ 27,000 $ 36,000 $ 80,000 d. e f & Heat, power, and water costs were incurred in the factory: $42.000. Prepaid insurance expired during the year: $10,000 (90% relates to factory operations, and 10% relates to selling and administrative activities). Advertising costs were incurred, $50,000. Depreciation was recorded for the year: $60,000 (85% relates to factory operations, and 15% relates to selling and administrative activities). Manufacturing overhead cost was applied to production. The company recorded 40,000 machine- hours for the year. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse. Sales for the year totalled $700,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $475,000.

Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to properly dispose of any balance in the Manufacturing Overhead account.

Answer 1

Predetermined overhead rate = $ 153,000 / 36,000 machine hours = $ 4.25 per machine hour.

Overhead applied during the year = 40,000 machine hours x $ 4.25 = $ 170,000.

Overhead incurred during the year = $ 167,000.

Manufacturing overhead overapplied : $ 170,000 - $ 167,000 = $ 3,000.

Indirect materials	$ 38,000
Indirect labor	27,000
Heat, power and water costs	42,000
Insurance	9,000
Depreciation	51,000
Total manufacturing overhead incurred	$ 167,000

Adjusting entry to dispose of overapplied manufacturing overhead:

	Debit	Credit
Manufacturing Overhead	$ 3,000
Cost of Goods Sold		$ 3,000