Durham Company uses a job-ordering cost system. The following transaction took p

Question

Durham Company uses a job-ordering cost system. The following transaction took place last year: a. Raw materials requisitioned for use in production , $53,000( 75% direct and 25% indirect) b. Factory utility costs incurred, $15,900 c. Depreciation recorded on plant and equipment, $30,600. Three-fourths of the depreciation relates to factor equipment, and remainder relates to selling and administrative equipment d. Costs for salaries and wages were incurred as follows: Direct labor...........$53,000 Indirect Labor.......$19,300 Sales commissions.....$11,300 Administrative salaries.....$38,000 e. Insurance costs incurred, $5,600 (75% relates to factory operations, and 25% relates to selling and administrative activities f. Miscellaneous selling and administrative expenses incurred, $19,300 g. Manufacturing overhead was applied to production. The company applies overhead on the basis of 130% of direct labor cost. h. Goods that cost $143,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse i. Goods that had cost $133,000 to manufacture according to their job cost sheets were sold for $226,000 Required: 1. Determine the underapplied or overapplied overhead for the year 2. Prepare an income statement for the year. (HInt: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead). Durham Company Income Statement For the Year Ended December 31

Explanation / Answer

(1).

Applied manufacturing overhead are 130% of direct labor cost

Direct labor cost is given = $53000

Hence, Applied manufacturing overhead ($53000 * 1.30) = $68900

Now let’s calculate actual manufacturing overhead;

Indirect raw material ($53000 * 0.25)

$13250

Indirect labor

$19300

Factory Utility cost

$15900

Depreciation ($30600 * 3 / 4)

$22950

Insurance cost ($5600 * 0.75)

$4200

Total actual manufacturing overhead

$75600

Applied manufacturing overhead (Calculated above)

$68900

Thus under-applied manufacturing overhead ($75600 – $68900)

$6700

(2).

Durham Company

Income Statement

Sales

$226000

Add: Finished goods inventory

$143000

Total revenue

$369000

Less: Expenses;

Underapplied Manufacturing Overhead

$6700

Administrative salary

$38000

Sales Commission

$11300

Depreciation of selling equipment ($30600 / 4)

$7650

Insurance ($5600 * 0.25)

$1400

Mise selling & administrative exp.

$19300

Total expenses

($84350)

Net income

$284650

Indirect raw material ($53000 * 0.25)

$13250

Indirect labor

$19300

Factory Utility cost

$15900

Depreciation ($30600 * 3 / 4)

$22950

Insurance cost ($5600 * 0.75)

$4200

Total actual manufacturing overhead

$75600

Applied manufacturing overhead (Calculated above)

$68900

Thus under-applied manufacturing overhead ($75600 – $68900)

$6700

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