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 85,000
Fixed manufacturing overhead cost $ 1,276,000
Variable manufacturing overhead per computer-hour $ 3.40
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 40,000
Manufacturing overhead cost $ 788,000
Inventories at year-end:
Raw materials $ 430,000
Work in process $ 160,000
Finished goods $ 1,020,000
Cost of goods sold $ 2,790,000
Required:
1.
Compute the company’s predetermined overhead rate for the year. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Predetermined overhead rate $ per hour
2.
Compute the underapplied or overapplied overhead for the year. (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount. Input the amount as positive value. Omit the "$" sign in your response.)
(Click to select)OverappliedUnderapplied overhead cost $
3.
Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold. Prepare the appropriate entry. (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
General Journal Debit Credit
(Click to select)Accounts payableFinished goodsRaw materialsSalaries expenseManufacturing overheadWork in processDepreciation expenseCost of goods sold
(Click to select)Manufacturing overheadSalaries expenseFinished goodsCost of goods soldAccounts payableWork in processDepreciation expenseRaw materials
4.
Assume that the company allocates any underapplied or overapplied overhead to work in process, finished goods, and cost of goods sold on the basis of the amount of overhead applied during the year that remains in each account at the end of the year. These amounts are $44,184 for work in process, $206,192 for finished goods, and $486,024 for cost of goods sold. Prepare the journal entry to show the allocation. (Round your intermediate calculations and percentage values to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
General Journal Debit Credit
(Click to select)Raw materialsSalaries expenseDepreciation expenseWork in processManufacturing overheadCost of goods soldAccounts payableFinished goods
(Click to select)Salaries expenseRaw materialsCost of goods soldWork in processAccounts payableFinished goodsManufacturing overheadDepreciation expense
(Click to select)Finished goodsWork in processAccounts payableDepreciation expenseSalaries expenseRaw materialsManufacturing overheadCost of goods sold
(Click to select)Finished goodsManufacturing overheadWork in processDepreciation expenseCost of goods soldSalaries expenseRaw materialsAccounts payable
5.
How much higher or lower will net operating income be for the year if the underapplied or overapplied overhead is allocated rather than closed directly to cost of goods sold? (Round your intermediate calculations and percentage values to 2 decimal places and final answers to the nearest dollar amount. Input the amount as positive value. Omit the "$" sign in your response.)
Net operating income will be $ (Click to select)greaterlesser if the (Click to select)underappliedoverapplied overhead is allocated among work in process, finished goods, and cost of goods sold rather than closed directly to cost of goods sold.
To answer the questions, we'll need to use the given information and perform some calculations. Here's how to get the answers:
1. To compute the predetermined overhead rate:
- Divide the total manufacturing overhead cost by the total estimated computer-hours.
- Predetermined overhead rate = Fixed manufacturing overhead cost / Computer-hours
- Predetermined overhead rate = $1,276,000 / 85,000
- Predetermined overhead rate = $15.01 per hour
2. To compute the underapplied or overapplied overhead:
- Calculate the total manufacturing overhead cost incurred during the year by adding the fixed and variable manufacturing overhead cost.
- Manufacturing overhead cost incurred = Fixed manufacturing overhead cost + (Variable manufacturing overhead per computer-hour x Computer-hours)
- Manufacturing overhead cost incurred = $1,276,000 + ($3.40 x 40,000)
- Manufacturing overhead cost incurred = $1,276,000 + $136,000
- Manufacturing overhead cost incurred = $1,412,000
- Calculate the difference between the manufacturing overhead cost incurred and the manufacturing overhead cost applied using the predetermined overhead rate.
- Underapplied or overapplied overhead = Manufacturing overhead cost incurred - (Predetermined overhead rate x Computer-hours)
- Underapplied or overapplied overhead = $1,412,000 - ($15.01 x 40,000)
3. To prepare the appropriate entry for closing underapplied or overapplied overhead to cost of goods sold:
- Debit or credit the appropriate accounts depending on whether the overhead is underapplied or overapplied.
- If the overhead is overapplied (a credit balance), debit Cost of Goods Sold.
- If the overhead is underapplied (a debit balance), credit Cost of Goods Sold.
4. To prepare the journal entry to allocate underapplied or overapplied overhead:
- Allocate the underapplied or overapplied overhead to work in process, finished goods, and cost of goods sold based on the amounts remaining in each account at the end of the year.
- Debit or credit the appropriate accounts based on the allocation amounts.
- The allocation amounts are already given: $44,184 for work in process, $206,192 for finished goods, and $486,024 for cost of goods sold.
5. To calculate the difference in net operating income if overhead is allocated rather than closed directly to cost of goods sold:
- Calculate the net operating income when the overhead is closed directly to cost of goods sold.
- Calculate the net operating income when the overhead is allocated among work in process, finished goods, and cost of goods sold.
- Subtract the net operating income with the overhead allocated from the net operating income with the overhead closed directly to cost of goods sold.
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