Crimson Tide Company uses a job-order costing system. At Crimson Tide, overhead

Question

Crimson Tide Company uses a job-order costing system. At Crimson Tide, overhead costs are applied to jobs on the basis of machine-hours. For the current year, Crimson Tide estimated that its machines would work for a total of 34,000 machine-hours. Tide also estimated for the current year that it would incur $176,800 in manufacturing overhead cost. The following transactions occurred during the year: a. Raw materials requisitioned for use in production, $308,000 (80% direct and 20% indirect). b. The following costs were incurred for employee services: Direct labor $ 179,000 Indirect labor $ 37,000 Sales commissions $ 29,000 Administrative salaries $ 44,000 c. Total insurance costs were $29,000 Note: Of the total insurance cost, 90% relates to factory operations, and 10% relates to selling and administrative activities. d. In the factory only, heat, power, and water costs incurred in the factory totalled $75,000. e. Total depreciation recorded for the year was $79,000 Note: Of the total depreciation recorded 85% relates to factory operations, and 15% relates to selling and administrative activities. f. Advertising costs incurred was $69,000. g. According to their job cost sheets, goods that cost $499,000 to manufacture were transferred to the finished goods warehouse. h. Sales for the year totaled $738,000. The total cost to manufacture these goods according to their job cost sheets was $494,000. i. The company actually used 59,000 machine-hours during the year. Required: 1. Determine the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.). 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.) (Round predetermined overhead rate to 2 decimal places.)

Explanation / Answer

1. Determinig over applied or uder applied overhead

Predetermined Overhead rate at begning of year

= estimated manufacturing overhead cost / estimated total units in the allocation base

= $ 176800 / 34000 hours

= $ 5.2 per machine hour

Based on the 59000 hours actually applied during the year , the company would have applied $ 306800 in overhead cost to production :

59000 hours X $ 5.2 per machine hour

= $ 306800

= $ 360800 - 266850*

= $ 39950 Overapplied

*Manufacturing Overheads

Raw Material (Indirect) 61600

Indirect Labour 37000

Heat power water cost 75000

Depreciation (Factory) 67150

Insurance (Direct)    26100

Total 266850

2. Income Statement

Crimson Tide Company

Income Statement

For the year ended 30June 2015

Sales 738000

Less : Cost of Goods Sold to manufacture sales 494000

Gross Profit 244000

Less : Selling and Administrative expenses

Sales Commision 29000

Administrating Salary 44000

Adverstsing Expenses 69000

Depreciation (indirect) 11850

Insurance 2900

156750

Net Operating Income $87250

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