Chapter 3, Problem 62C

FiberCom, Inc., a manufacturer of fiber optic communications equipment, uses a job-order costing system. Since the production process is heavily automated, manufacturing overhead is applied on the basis of machine hours using a predetermined overhead rate. The current annual rate of $15 per machine hour is based on budgeted manufacturing overhead costs of $1,200,000 and a budgeted activity level of 80,000 machine hours (the company’s estimated practical capacity). Operations for the year have been completed, and all of the accounting entries have been made for the year except the application of manufacturing overhead to the jobs worked on during December, the transfer of costs from Work-in-Process to Finished-Goods for the jobs completed in December, and the transfer of costs from Finished Goods to Cost of Goods Sold for the jobs that have been sold during December. Summarized data as of November 30 and for the month of December are presented in the following table. Jobs T11-007, N11-013, and N11-015 were completed during December. All completed jobs except Job N11-013 had been turned over to customers by the close of business on December 31.

Required:

1. 1. Explain why manufacturers use a predetermined overhead rate to apply manufacturing overhead to their jobs.
2. 2. How much manufacturing overhead would FiberCom have applied to jobs through November 30 of the year just completed?
3. 3. How much manufacturing overhead would have been applied to jobs during December of the year just completed?
4. 4. Determine the amount by which manufacturing overhead is over applied or under applied as of December 31 of the year just completed.
5. 5. Determine the balance in the Finished-Goods Inventory account on December 31 of the year just completed.
6. 6. Prepare a Schedule of Cost of Goods Manufactured for FiberCom, Inc. for the year just completed. (Hint: In computing the cost of direct material used, remember that FiberCom includes both direct and indirect material in its Raw-Material Inventory account.)

To determine

Explain the reason for using the predetermined overhead rate by the manufacturers to apply manufacturing overhead to their jobs.

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.

The predetermined overhead rates are used by the manufacturers to allocate it to the production jobs the costs incurred for the production are not directly traceable to the particular job. This could result the management to have the timely and accurate job-cost information. The predetermined overhead rates are easy to apply and avoid fluctuations.

To determine

Calculate the manufacturing overhead would Incorporation FC have applied to jobs through November 30 for the year just completed.

Explanation of Solution

Calculate the manufacturing overhead would Incorporation FC have applied to jobs through November 30 for the year just completed.

$\begin{array}{c}\text{Overhead applied}=\text{Machine hours}\times \text{Predetermined overhead rate}\\ =73,000\times \text{\$15}\\ =\$1,095,000\end{array}$

Thus the manufacturing overhead applied is $1,095,000.

To determine

Calculate the manufacturing overhead would Incorporation FC have applied to jobs during December for the year just completed.

Explanation of Solution

Calculate the manufacturing overhead would Incorporation FC have applied to jobs during December for the year just completed.

$\begin{array}{c}\text{Overhead applied}=\text{Machine hours}\times \text{Predetermined overhead rate}\\ =6,000\times \text{\$15}\\ =\$90,000\end{array}$

Thus the manufacturing overhead applied is $90,000.

To determine

Calculate the amount by which the manufacturing overhead is overapplied or underapplied as of December 31 for the job completed.

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.

Calculate the amount by which the manufacturing overhead is overapplied or underapplied as of December 31 for the job completed.

Particulars	Calculation	Amount ($)
Actual overhead	$\left(\$1,100,000+\$96,000\right)$	$1,196,000
Applied overhead	$\left(\$1,095,000+\$90,000\right)$	($1,185,000)
Underapplied overhead		$11,000

Table (1)

Thus, the underapplied overhead is $11,000.

To determine

Calculate the balance in the finished-goods inventory account on December 31 of the year just completed.

Explanation of Solution

Calculate the balance in the finished-goods inventory account on December 31 of the year just completed.

Particulars	Amount ($)
November 30 balance for Job No. N11-013	$ 55,000
December direct material	4,000
December direct labor	12,000
December overhead $\left(1,000\times \$15\right)$	15,000
Total finished-goods inventory	$ 86,000

Table (2)

Thus, the total finished-goods inventory is $86,000.

To determine

Prepare the schedule of cost of goods manufactured for Incorporation FC for the year just completed.

Explanation of Solution

Cost of goods manufactured: Cost of goods manufactured refers to the cost incurred for a making a product, that are available for sales at the end of the accounting period.

Prepare the schedule of cost of goods manufactured for Incorporation FC for the year just completed.

Incorporation FC
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Particulars	Amount ($)	Amount ($)
Direct material:
Raw-material inventory, 1/1		$105,000
Raw-material purchases $\left(\text{\$965,000+\$98,000}\right)$		$1,063,000
Raw material available for use		$1,168,000
Deduct: Indirect material used $\left(\text{\$125,000+\$9,000}\right)$	$134,000
Raw-material inventory 12/31	$85,000	$219,000
Raw material used		$949,000
Direct labor $\left(\text{\$845,000+\$80,000}\right)$		$925,000
Manufacturing overhead:
Indirect material $\left(\text{\$125,000+\$9,000}\right)$	$134,000
Indirect labor $\left(\text{\$345,000+\$30,000}\right)$	$375,000
Utilities $\left(\text{\$245,000+\$22,000}\right)$	$267,000
Depreciation $\left(\text{\$385,000+\$35,000}\right)$	$420,000
Total actual manufacturing overhead		$1,196,000
Less: Underapplied overhead		$11,000
Overhead applied to work in process		$1,185,000
Total manufacturing costs		$3,059,000
Add: Work-in-process inventory, 1/1		$60,000
Subtotal		$3,119,000
Less: Work-in-process inventory, 12/31 (1)		$150,200
Cost of goods manufactured		$2,968,800

Table (3)

Working note (1):

Calculate the work-in process inventory as of 12/31.

Particulars	D12-002	D12-003	Total
Direct material	$37,900	$26,000	$63,900
Direct labor	$20,000	$16,800	$36,800
Applied overhead:
$\left(\text{2,500 hours}\times \text{\$15}\right)$	$37,500	$0	$37,500
$\left(\text{800 hours}\times \text{\$15}\right)$	$0	$12,000	$12,000
Total	$ 95,400	$ 54,800	$ 150,200

Table (4)