Question

5. Irma Corporation uses a job-order costing system and applies manufacturing overhead to jobs using a

predetermined overhead rate based on direct labor-hours. Last year manufacturing overhead and direct

labor-hours were estimated at $84,000 and 24,000 hours, respectively, for the year. In June, Job #168 was

completed. Materials costs on the job totaled $6,000 and labor costs totaled $3,600 at $6.00 per hour. At

the end of the year, it was determined that the company worked 32,000 direct labor-hours for the year and

incurred $100,600 in actual manufacturing overhead costs.

Required:

A) Job #168 contained 50 units. Determine the unit product cost that would appear on the job cost sheet.

(Total job cost: $11,700. Unit Product Cost is: $234)

B) What was the total applied overhead for the year? Was it under-applied or over-applied? (Total

Applied Overhead: $112,000. Over-applied by $11,400)

C) Irma has a policy to close out the under-applied or over-applied overhead to Cost of Goods Sold. If

the COGS for the year before the overhead adjustment was $256,000, what would be the COGS after

the adjustment of the over- or under-applied overhead? ($244,600)

Answer 1

• In the job order costing predetermined overhead rate per hour is found out and allocated to jobs on the basis of the hours used by job.
• At the end any difference in allocated and actual costs are closed to cost of good sold.
• First we will find pre determined overhead rate per direct labor hours

=Total estimated overhead cost / direct labor hours

=$84000/24000

=$3.5 per direct labor hour

A) we will allocate overhead cost on the basis direct labor hours

labor cost per hour = total labor cost/labor hours used

$6 = 3600/labor hours used by #168

=3600/6

=600 hours

we will allocate overhead cost on the basis of 600hours to #168

Total job cost

direct material	$6000
direct labor	$3600
overhead cost [600 hours*$3.5 per hour]	$2,100
Total job cost [6000+3600+2100]	$11,700
unit product cost [total cost / number of units][$11700/50]	$234

B) Applied overhead = pre determined overhead rate*Actual direct labor hours

=$3.5 per hour*32,000 direct labor hours

=$112,000

Actual overhead ($100,600) is lower than applied overhead ($112,000) so the overhead was over applied by [112000-100600] $11,400.

C) As the overhead cost was over applied , we will reduce the cost and bring it down to actual ($100,600)

so cost of goods sold will be credited and reduced by $11,400.

=$256,000-$11,400

cost of goods sold will be = $244,600