Question

Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Computer-hours		80,000
Fixed manufacturing overhead cost	$	1,271,000
Variable manufacturing overhead per computer-hour	$	3.90

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Computer-hours		50,000
Manufacturing overhead cost	$	1,069,000
Inventories at year-end:
Raw materials	$	450,000
Work in process	$	150,000
Finished goods	$	1,040,000
Cost of goods sold	$	2,750,000

1. Compute the company’s predetermined overhead rate for the year.

2. Compute the underapplied or overapplied overhead for the year.

3. Determine the cost of goods sold for the year after any adjustment for underapplied or overapplied overhead.

Answer 1