Chapter 3, Problem 53P

Midnight Sun Apparel Company uses normal costing, and manufacturing overhead is applied to work in-process on the basis of machine hours. On January 1 of the current year, there were no balances in work-in-process or finished-goods inventories. The following estimates were included in the current year’s budget.

During January, the firm began the following production jobs:

During January, job numbers A79 and N08 were completed, and job number A79 was sold. The actual manufacturing overhead incurred during January was $26,000.

Required:

1. 1. Compute the company’s predetermined overhead rate for the current year.
2. 2. How much manufacturing overhead was applied to production during January?
3. 3. Calculate the over applied or under applied overhead for January.
4. 4. Prepare a journal entry to close the balance calculated in requirement (3) into Cost of Goods Sold.
5. 5. Prepare a journal entry to prorate the balance calculated in requirement (3) among the Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold accounts.

To determine

Calculate the predetermined overhead rate for Company MSA for the current year.

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 predetermined overhead rate for Company MSA for the current year.

$\begin{array}{c}\text{Predetermined overheadrate}=\frac{\text{Budgeted manufacturing overhead rate}}{\text{Budgeted machine hours}}\\ =\frac{\$235,000}{47,000}\\ =\$5\text{ per machine hour}\end{array}$

Thus, the predetermined overhead rate for Company MSA for the current year is $5 per machine hour.

To determine

Calculate the amount of manufacturing overhead was applied to production for the month January.

Explanation of Solution

Manufacturing overheads:

Manufacturing overheads refers to the indirect factory- related cost that has occurred while manufacturing a product. Some of the examples of manufacturing overheads are indirect labor, indirect materials, factory building and indirect factory supplies.

Calculate the amount of manufacturing overhead was applied to production for the month January.

$\begin{array}{c}\text{Applied manufacturing overhead}=\left(\begin{array}{l}\text{Machine hours used}\times \\ \text{Predetermined overhead rate}\end{array}\right)\\ =\left(4,000\text{ hours}\times \text{\$5Per hour}\right)\\ =\$20,000\end{array}$

Thus, the amount of manufacturing overhead was applied to production for the month January is $20,000.

To determine

Compute the overapplied or underapplied overhead for January.

Explanation of Solution

Underapplied 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 underapplied overhead.

Overapplied 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.

Compute the overapplied or underapplied overhead for January.

$\begin{array}{c}\text{Underapplied or overapplied overhead}=\left(\text{Actual overhead}-\text{Applied overhead}\right)\\ =\left(\$26,000-\$20,000\right)\\ \text{Underapplied overhead}=\$6,000\end{array}$

During the month January, the overhead is underapplied by $6,000.

To determine

Record the journal entry to close the underapplied overhead to cost of goods sold.

Explanation of Solution

Record the journal entry to close the underapplied overhead to cost of goods sold.

Date	Account title and explanation	Debit ($)	Credit ($)
	Cost of goods sold	6,000
	Manufacturing overhead		6,000
	(To close the underapplied overhead to cost of goods sold)

Table (1)

• Cost of goods sold is an expense account and it decreases the value of stockholders’ equity. Thus, debit cost of goods sold with $6,000.
• Manufacturing overhead is credited as the overhead is underapplied. Thus, credit manufacturing overhead with $6,000.

To determine

Record the journal entry to prorate the balance among the work-in-process inventory, finished goods inventory, and cost of goods sold account.

Explanation of Solution

1. a. Calculate the proration amounts.

Account		Amount	Percentage (2)
Work in Process	Job P82 only	$ 2,500	(1) 12.5%
Finished Goods	Job N08 only	12,500	(2) 2.5%
Cost of Goods sold	Job A79 only	5,000	(3) 25.00%
Total		$ 20,000	100.00%

Table (2)

Note: The amount is calculated by using the following formula.

$\text{Amount}=\text{Machine hours used on job}\times \text{Predetermined overhead rate}$

Working note (1):

Calculate the amount of percentage for work-in-process.

$\begin{array}{c}\text{Percentage of work-in-process}=\frac{\text{Total amount}}{\text{Applied overhead}}\\ =\frac{2,500}{20,000}\\ =12.5\%\end{array}$

Working note (2):

Calculate the amount of percentage for finished goods.

$\begin{array}{c}\text{Percentage of finished goods}=\frac{\text{Total amount}}{\text{Applied overhead}}\\ =\frac{12,500}{20,000}\\ =62.5\%\end{array}$

Working note (3):

Calculate the amount of percentage for cost of goods sold.

$\begin{array}{c}\text{Percentage of cost of goods sold}=\frac{\text{Total amount}}{\text{Applied overhead}}\\ =\frac{5,000}{20,000}\\ =25.0\%\end{array}$

Account	Underapplied overhead	$\times$	Percentage	Amount added to Account
Work in Process	$ 6,000	$\times$	12.50%	$ 750
Finished Goods	$6,000	$\times$	62.50%	$3,750
Cost of Goods Sold	$6,000	$\times$	25.00%	$1,500
Total				$ 6,000

Table (3)

b) Journal entry.

Date	Account title and explanation	Debit ($)	Credit ($)
	Work-in-process inventory	750
	Finished-goods inventory	3,750
	Cost of goods sold	1,500
	Manufacturing overhead		6,000
	(To close the underapplied overhead to cost of goods sold)

Table (4)

• Work-in-process inventory is an asset account and it is increased. Thus, it is debited.
• Finished-goods inventory is an asset account and it is increased. Thus, it is debited.
• Cost of goods sold is an expense account and it decreases the stockholders’ equity. Thus it is debited.
• Manufacturing overhead is credited with 6,000.