Question

"Finlon Upholstery, Inc. uses a job-order costing system to accumulate manufacturing costs. The company’s work-in-process on December 31, 2001, 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.
Direct material used $5,550,000
Direct labor 4,350,000
Indirect material used 63,000
Indirect labor 2,860,000
Factory depreciation 1,740,000
Factory insurance 59,000
Factory utilities 830,000
Selling and administrative expenses 2,160,000
Total $17,612,000
Job no. 2077 was completed in January 2002; there was no work in process at year-end. All jobs produced during 2002 were sold with the exception of job no. 2143, which contained direct-material costs of $154,000 and direct-labor charges of $85,000. The company charges any under- or overapplied overhead to Cost of Goods Sold category.
Using the above information, do the following:1. Calculate the company’s predetermined overhead application rate.2. Calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing overhead.3. Calculate the finished-goods inventory for the 12/31/02 balance sheet.4. Calculate the over-applied or under-applied overhead at year-end.Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.

Answer 1

Answer:(1) $1.3 per direct labour cost, (2) $15,360,000 (3) ($82,200) (4) $11,957,000, it is appropriate to include selling and administrative expenses in the cost of good sold because it is the cost incurred when the goods were sold.

Explanation:

Budgeted Manufacturing overhead Cost / Budgeted Total unit in the Allocation Base

= 5,460,000 /4,200,000

= $1.3 per direct labour cost

To calculate the addition to work in process inventory

$

Raw materials. 5,550,000

Direct Labour. 4,350,000

Allocated manufacturing overhead 5,460,000

-------------------

Work in process inventory. 15,360,000

----------------------

calculate the addition to work in process inventory

$

Beginning work in process inventory. 156,800

Job no 2143 (Direct materials $154,000, Direct Labour $85,000,) 239,000

-------------

Finished good Inventory (job no 2077) (82,200)

----------

To calculate the over applied overhead or under applied overhead

POAR = Budgeted Manufacturing overhead / Budgeted Direct Labour

= 5,460,000/ 4,200,000

= $1.3 per direct labour × actual activity

= 1.3 × 4,350,000 = 5,655,000

Overhead absorbed = 5,655,000

Actual Overhead incurred - Overhead Absorbed

= 17,612,000 - 5,655,000

= $11,957,000

It is appropriate to include selling and administrative expenses in the cost of good sold category because it is the cost incurred when the goods were sold.