A corporation uses a job costing accounting system for its production costs. A p
ID: 2540508 • Letter: A
Question
A corporation uses a job costing accounting system for its production costs. A predetermined overhead rate based on direct labour 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:
Direct labour hours
50,000
60,000
70,000
Variable overhead costs
$350,000
$240,000
$490,000
Fixed overhead costs
216,000
216,000
216,000
Total overhead
$566,000
$636,000
$706,000
The expected volume is 60,000 direct labour hours for the entire year. The following information is for November, when Jobs 50 and 51 were completed.
Beginning inventories as at November 1:
Raw materials and supplies
$10,500
Work in process (Job 50)
54,000
Finished goods
112,500
Purchases:
Raw materials
135,000
Supplies
15,000
Materials and supplies requisitioned for production:
Job 50
45,000
Job 51
37,500
Job 52
25,500
Supplies
6,000
$114,000
Factory direct labour hours (DLH):
Job 50
3,500 DLH
Job 51
3,000 DLH
Job 52
2,000 DLH
Labour costs:
Direct labour wages (8,500 hours @$8)
$68,000
Indirect labour wages (4,000 hours)
17,000
Supervisory salaries
36,000
Building occupancy costs:
Factory maintenance
6,500
Factory depreciation
2,500
Factory power and lighting
4,000
Factory repairs
1,500
Administration office
2,500
$8,000
20f) At the end of the year, the Corporation had an amount of $1,000 over-applied overhead. What would be the most common treatment of the overapplied overhead?
A) Prorate it between Work in Process Inventory and Cost of Good manufactured accounts
B) Prorate it between Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Manufactured accounts
C) Carry it as a credit on the balance sheet
D) Carry it as miscellaneous operating revenue on the income statement
E) Credit it to Cost of Goods Sold in the Income Statement
Direct labour hours
50,000
60,000
70,000
Variable overhead costs
$350,000
$240,000
$490,000
Fixed overhead costs
216,000
216,000
216,000
Total overhead
$566,000
$636,000
$706,000
Explanation / Answer
Since the overheads are over applied by $1,000, the most common treatment is credit it to the cost of goods sold in bbincome statement. Since the overheads are over applied, the expenses charged are higher. To reduce this cost, cost of goods sold is credited.
Correct answer: E) Credit it to Costs of goods sold in the income statement
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