The expected volume is 24,000 direct labor-hours for the entire year. The following information — Script Company uses job costing accounting system its production costs

Script Company uses a job costing accounting system for its production costs. A predetermined overhead rate based on direct labor-hours is used to apply overhead to individual jobs. An estimate of overhead costs at different volumes was prepared for the current year as follows:

The expected volume is 24,000 direct labor-hours for the entire year. The following information

is for October, when jobs 1011 and 1015 were completed:

Inventories, October 1

Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . $ 100,800

Work in process (Job 1011) . . . . . . . . . . . . . . . . . . . . . . . . . 219,120

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,960

Purchases of raw materials and supplies

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,509,600

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,320

Materials and supplies requisitioned for production

Job 1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,400

Job 1015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562,800

Job 1017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,280

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,080

$1,534,560

Machine-hours (MH)

Job 1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,440 MH

Job 1015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,320 MH

Job 1017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 MH

Direct labor-hours (DLH)

Job 1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400 DLH

Job 1015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,660 DLH

Job 1017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220 DLH

Labor costs

Direct labor wages (all hours @ $48) . . . . . . . . . . . . . . . . . $685,440

Indirect labor wages (12,000 hours) . . . . . . . . . . . . . . . . . . 151,200

Supervisory salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,200

Building occupancy costs (heat, light, depreciation, etc.)

Factory facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,560

Sales and administrative offices . . . . . . . . . . . . . . . . . . . . . 34,080

Factory equipment costs

Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,320

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Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . 19,680

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,760

$ 95,760

Required

Answer the following questions:

a. Compute the predetermined overhead rate (combined fixed and variable) to be used to apply overhead to individual jobs during the year.

b. Compute the total cost of Job 1011 when it is finished.

c. How much of factory overhead cost was applied to Job 1017 during October?

d. What total amount of overhead was applied to jobs during October?

e. Compute actual factory overhead incurred during October.

f. At the end of the year, Script Company had the following account balances:

Balance

Under applied Overhead . . . . . . . . . . $ 7,200,000

Cost of Goods Sold . . . . . . . . . . . . . 67,200,000

Work-in-Process Inventory . . . . . . . . 9,600,000

Finished Goods Inventory . . . . . . . . 19,200,000

How would you recommend treating the under applied overhead? Show the effect on the account balances in the following table:

Under applied Overhead. . . . . . . . . . _________

Cost of Goods Sold. . . . . . . . . . . . . _________

Work-in-Process Inventory. . . . . . . . _________

Finished Goods Inventory . . . . . . . . _________

SOLUTION

		$98 per DLH.		$2,352,000	= $98 per DLH
		$98 per DLH.		24,000	= $98 per DLH

Beginning balance	$219,120
Direct materials	674,400
Direct labor	403,200	*
Overhead applied	840,000	**
	$2,136,720

*The wage rate for direct labor is $48.00 per hour. $48.00 x 8,400 hours = $403,200.

**$100.00 x 8,400 direct labor-hours.

c. $222,000 (= $100.00 x 2,220 direct labor-hours)

d. $1,428,000 (= $100.00 x 14,280 direct labor-hours

		Supplies	$ 184,080
		Indirect labor wages	151,200
		Supervisory salaries	307,200
		Factory facilities	88,560
		Factory equipment costs	95,760
			$826,800
f.	In this case, the under applied overhead is relatively large (it is greater than 10% of cost of goods sold, so the company might consider it material and decide to prorate it. (The decision depends, at least in part, on the how the resulting information will be used and who would be using it.) Without more detailed information on the direct labor (or applied overhead), we will allocate the under applied overhead based on account balances. The share would be 70% (= $67.2 million ÷ $96.0 million for cost of goods sold), 10% (= $9.6 million ÷ $96.0 million for Work-In-Process Inventory), and 20% (= $19.2 million ÷ $96.0 million for cost of goods sold) for Finished Goods Inventory. This yields:

Underapplied Overhead	$0
Cost of Goods Sold	$72,240,000*
Work-in-Process Inventory	10,320,000**
Finished Goods Inventory	20,640,000***
*$67,200,000 + (70% x $7,200,000)
**$9,600,000 + (10% x $7,200,000)
***$19,200,000 + (20% x $7,200,000)