B3 Company is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:
Beginning Ending
Raw materia $26,000 $31,000
Work in process 77,000 59,000
Finished goods 124,000 139,000
The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 24,000 machine-hours and incur $216,000 in manufacturing overhead cost. The following transactions were recorded for the year:
• Raw materials were purchased, $434,000.
• Raw materials were requisitioned for use in production, $429,000 ($405,000 direct and $24,000 indirect).
• The following employee costs were incurred: direct labor, $207,000; indirect labor, $79,000; and administrative salaries, $171,000.
• Selling costs, $103,000.
• Factory utility costs, $27,000.
• Depreciation for the year was $106,000 of which $97,000 is related to factory operations and $9,000 is related to selling and administrative activities.
• Manufacturing overhead was applied to jobs. The actual level of activity for the year was 25,000 machine-hours.
• Sales for the year totaled $1,147,000.
Required:
a. Prepare a schedule of cost of goods manufactured in good form.
b. Was the overhead under- or overapplied? By how much?
Prepare an income statement for the year in good form. The company closes any under- or overapplied overhead to Cost of Goods Sold
a. Schedule of Cost of Goods Manufactured:
Beginning Raw materials inventory: $26,000
Add: Raw materials purchased: $434,000
Total raw materials available: $460,000
Less: Ending raw materials inventory: ($31,000)
Raw materials used in production: $429,000
Add: Direct labor: $207,000
Add: Factory overhead:
Indirect materials: $24,000
Indirect labor: $79,000
Factory utility costs: $27,000
Depreciation (factory operations): $97,000
Total manufacturing cost: $863,000
Add: Beginning work in process inventory: $77,000
Total cost of work in process: $940,000
Less: Ending work in process inventory: ($59,000)
Cost of goods manufactured: $881,000
b. To calculate if overhead was under- or overapplied, we need to compare the actual overhead incurred to the overhead applied based on the predetermined overhead rate.
Actual overhead incurred: $216,000
Overhead applied based on predetermined rate: 25,000 machine-hours * predetermined rate
The predetermined rate can be calculated by dividing the estimated overhead cost by the estimated machine-hours:
Predetermined rate = $216,000 / 24,000 machine-hours
Predetermined rate = $9 per machine-hour
Overhead applied = 25,000 machine-hours * $9 per machine-hour
Overhead applied = $225,000
The overhead is overapplied by $9,000 ($225,000 - $216,000).
Income Statement:
Sales: $1,147,000
Cost of goods sold:
Beginning finished goods inventory: $124,000
Add: Cost of goods manufactured: $881,000
Goods available for sale: $1,005,000
Less: Ending finished goods inventory: ($139,000)
Cost of goods sold: $866,000
Gross profit: $281,000
Operating expenses:
Selling costs: $103,000
Administrative salaries: $171,000
Depreciation (selling and administrative activities): $9,000
Total operating expenses: $283,000
Net loss: ($2,000)
a. Schedule of Cost of Goods Manufactured:
Raw materials:
Beginning balance: $26,000
Purchases: $434,000
Total available: $460,000
Ending balance: $31,000
Raw materials used: $429,000
Direct labor: $207,000
Indirect labor: $79,000
Factory utility costs: $27,000
Depreciation (factory operations): $97,000
Total manufacturing overhead: $410,000
Total manufacturing costs: $1,046,000
Add: Beginning work in process: $77,000
Less: Ending work in process: $59,000
Cost of goods manufactured: $1,064,000
b. Calculation of Overhead Applied:
Predetermined overhead rate = estimated overhead costs / estimated machine-hours
Predetermined overhead rate = $216,000 / 24,000 machine-hours
Predetermined overhead rate = $9 per machine-hour
Overhead applied = actual machine-hours used x predetermined overhead rate
Overhead applied = 25,000 machine-hours x $9 per machine-hour
Overhead applied = $225,000
Actual overhead costs = factory utility costs + depreciation (factory operations)
Actual overhead costs = $27,000 + $97,000
Actual overhead costs = $124,000
Overhead under-/overapplied = overhead applied - actual overhead costs
Overhead under-/overapplied = $225,000 - $124,000
Overhead overapplied = $101,000
c. Income Statement:
Sales: $1,147,000
Cost of goods sold:
Beginning finished goods inventory: $124,000
Add: Cost of goods manufactured: $1,064,000
Total goods available for sale: $1,188,000
Less: Ending finished goods inventory: $139,000
Cost of goods sold: $1,049,000
Gross profit: $98,000
Less: Selling costs: $103,000
Less: Administrative salaries: $171,000
Less: Depreciation (selling and administrative activities): $9,000
Net loss: ($185,000)
As the company incurred a net loss, the underapplied overhead of $101,000 will be added to the cost of goods sold to help absorb the loss. Therefore, the adjusted net loss would be ($284,000) ($185,000 - $99,000).
To prepare a schedule of cost of goods manufactured and an income statement for B3 Company, we need to follow these steps:
Step 1: Calculate the Total Manufacturing Costs:
- Add up the following costs:
- Raw materials used in production (requisitioned), including direct and indirect: $429,000
- Direct labor cost: $207,000
- Indirect labor cost: $79,000
- Factory utility costs: $27,000
- Depreciation (related to factory operations): $97,000
- Total Manufacturing Costs = $429,000 + $207,000 + $79,000 + $27,000 + $97,000 = $839,000
Step 2: Calculate the Cost of Goods Manufactured:
- Add the beginning Work in Process (WIP) inventory to the Total Manufacturing Costs and subtract the ending WIP inventory:
- Beginning WIP inventory: $77,000
- Ending WIP inventory: $59,000
- Cost of Goods Manufactured = $839,000 + $77,000 - $59,000 = $857,000
The Schedule of Cost of Goods Manufactured:
Cost of Goods Manufactured
Raw materials:
Beginning inventory $26,000
Add: Purchases $434,000
Total materials $460,000
Less: Ending inventory $31,000
Raw materials used $429,000
Direct labor $207,000
Manufacturing overhead applied $857,000 (calculated above)
Total manufacturing costs $839,000 (calculated above)
Add: Beginning WIP inventory $77,000
Less: Ending WIP inventory $59,000
Cost of Goods Manufactured $857,000
Step 3: Calculate the Cost of Goods Sold:
- Add the beginning Finished Goods inventory to the Cost of Goods Manufactured and subtract the ending Finished Goods inventory:
- Beginning Finished Goods inventory: $124,000
- Ending Finished Goods inventory: $139,000
- Cost of Goods Sold = $857,000 + $124,000 - $139,000 = $842,000
Step 4: Calculate the Overhead Application Rate and Applied Overhead:
- Overhead Application Rate = Estimated Overhead / Estimated Machine Hours
- Estimated Overhead: $216,000
- Estimated Machine Hours: 24,000
- Overhead Application Rate = $216,000 / 24,000 machine-hours = $9 per machine-hour
- Applied Overhead = Overhead Application Rate * Actual Machine Hours
- Actual Machine Hours: 25,000
- Applied Overhead = $9 * 25,000 = $225,000
Step 5: Determine Overhead Under- or Overapplied:
- Overhead Under- or Overapplied = Applied Overhead - Actual Overhead
- Actual Overhead = Depreciation (related to factory operations) + Factory utility costs = $97,000 + $27,000 = $124,000
- Overhead Under- or Overapplied = $225,000 - $124,000 = $101,000 (Overapplied by $101,000)
The Income Statement:
Income Statement
Sales $1,147,000
Cost of Goods Sold:
Beginning Finished Goods inventory $124,000
Add: Cost of Goods Manufactured (from the schedule) $857,000
Goods available for sale $981,000
Less: Ending Finished Goods inventory $139,000
Cost of Goods Sold $842,000
Gross Profit $305,000
Operating Expenses:
Selling costs $103,000
Administrative salaries $171,000
Total Operating Expenses $274,000
Net Income $31,000
Note: The overapplied overhead of $101,000 is closed to Cost of Goods Sold on the income statement, which affects the calculation of Net Income.