Chapter 3, Problem 46P

Finlon Upholstery, Inc. uses a job-order costing system to accumulate manufacturing costs. The company’s work-in-process on December 31, 20x1, consisted of one job (no. 2077), which was carried on the year-end balance sheet at $156,800. There was no finished-goods inventory on this date.

Finlon applies manufacturing overhead to production on the basis of direct-labor cost. (The budgeted direct-labor cost is the company’s practical capacity, in terms of direct-labor hours, multiplied by the budgeted direct-labor rate.) Budgeted totals for 20x2 for direct labor and manufacturing overhead are $4,200,000 and $5,460,000, respectively. Actual results for the year follow.

Job no. 2077 was completed in January 20x2; there was no work in process at year-end. All jobs produced during 20x2 were sold with the exception of job no. 2143, which contained direct-material costs of $156,000 and direct-labor charges of $85,000. The company charges any under- or overapplied overhead to Cost of Goods Sold.

Required:

1. 1. Determine the company’s predetermined overhead application rate.
2. 2. Determine the additions to the Work-in-Process Inventory account for direct material used, direct labor, and manufacturing overhead.
3. 3. Compute the amount that the company would disclose as finished-goods inventory on the December 31, 20x2, balance sheet.
4. 4. Prepare the journal entry needed to record the year’s completed production.
5. 5. Compute the amount of under- or overapplied overhead at year-end, and prepare the necessary journal entry to record its disposition.
6. 6. Determine the company’s 20x2 cost of goods sold.
7. 7. Would it be appropriate to include selling and administrative expenses in either manufacturing overhead or cost of goods sold? Briefly explain.

To determine

Calculate the amount of Company F’s predetermined overhead application rate.

Explanation of Solution

Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials.

Calculate the amount of Company F’s predetermined overhead application rate.

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Budgeted overhead}}{\text{Budgeted direct-labor cost}}\\ =\frac{\$5,460,000}{\$4,200,000}\\ =130\%\text{ of direct labor cost}\end{array}$

Thus, the amount of Company F’s predetermined overhead application rate is 130% of direct labor cost.

To determine

Calculate the additions that are made to the work-in-process inventory account for direct materials used, direct labor, and manufacturing overhead.

Explanation of Solution

Work-in-process is the middle part of raw materials and finished goods. This inventory is the portion of the manufactured inventory for which the process has been started but not yet completed.

Calculate the additions that are made to the work-in-process inventory account for direct materials used, direct labor, and manufacturing overhead.

Particulars	Amount ($)
Direct materials used	$5,600,000
Direct labor	$4,350,000
Manufacturing overhead $\left(\$4,350,000\times 130\%\right)$	$5,655,000
Total	$15,605,000

Table (1)

Thus, the total addition (debits) made to work-in process inventory account is $15,605,000.

To determine

Identify the amount that would be disclosed by the company as finished goods inventory on the balance sheet as of December 31, 20x2.

Explanation of Solution

Finished goods inventory are completely ready for sale after completing the production process.

The amount that would be disclosed by the company as finished goods inventory on the balance sheet as of December 31, 20x2 is $351,500$\left(\$156,000+\$85,000+\left[\$85,000\times 130\%\right]\right)$.

To determine

Prepare the journal entry in the books of Company F to record the year’s completed production.

Explanation of Solution

Prepare the journal entry in the books of Company F to record the year’s completed production.

Date	Account title and explanation	Debit ($)	Credit ($)
	Finished-goods inventory $\left(\$156,800+\$15,605,000\right)$	15,761,800
	Work-in-process inventory		15,761,800
	(To record the company’s completed production)

Table (2)

To determine

Calculate the amount of under-applied or over-applied at year end and record its disposition.

Explanation of Solution

Under-applied overhead:

When there is a debit balance in the manufacturing overhead account during the month end, it indicates that overheads applied to jobs are less than the actual overhead cost incurred by the business. Therefore, the debit balance in the manufacturing overhead account is referred to as under-applied overhead.

Over-applied overhead:

When there is a credit balance in the manufacturing overhead account during the month end, indicates that overheads applied to jobs is more than the actual overhead cost incurred by the business. Therefore, the credit balance in the manufacturing overhead account is referred to as over- applied overhead.

Step 1: calculate the amount of actual overhead.

Particulars	Amount ($)
Indirect materials used	$65,000
Indirect labor	$2,860,000
Factory depreciation	$1,740,000
Factory insurance	$59,000
Factory utilities	$830,000
Total	$5,554,000

Table (3)

Step 2: Calculate the amount of under-applied or over-applied overhead.

$\begin{array}{c}\begin{array}{l}\text{Under-applied or }\\ \text{over-applied overhead}\end{array}\}=\text{Applied overhead}-\text{Actual overhead}\\ =\$5,655,000\left(1\right)-\$5,554,000\\ \text{Over-applied}=\$101,000\end{array}$

Working note (1):

Calculate the amount of applied overhead.

$\begin{array}{c}\text{Applied overhead}=130\%\times \text{Direct labor cost}\\ =130\%\times \$4,350,000\\ =\$5,655,000\end{array}$

Thus, the overhead is over-applied by $101,000.

Prepare the journal entry.

Date	Account title and explanation	Debit ($)	Credit ($)
	Manufacturing overhead	101,000
	Cost of goods sold		101,000
	(To record the company’s completed production)

Table (4)

To determine

Calculate the cost of goods sold of Company F for the year 20x2.

Explanation of Solution

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

Calculate the cost of goods sold of Company F for the year 20x2.

Particulars	Amount ($)
Finished-goods inventory, January 1	$0
Add: Cost of goods manufactured	$15,761,800
Cost of goods available for sale	$15,761,800
Less: Finished-goods inventory, December 31	$351,500
Unadjusted cost of goods sold	$15,410,300
Less: Over applied overhead	$101,000
Cost of goods sold	$15,309,300

Table (5)

Thus, the amount of cost of goods sold is $15,309,300.

To determine

Explain whether it would be appropriate to include selling and administrative expenses in either manufacturing overhead or cost of goods sold.

Explanation of Solution

Selling and administrative expenses are the operating expenses of the company. These costs are considered as the period cost rather than the product costs. Hence, these costs are unrelated to manufacturing overhead and cost of goods sold. Thus, it cannot be included.