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Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the years overhead and relating it to direct labour costs. The budget for 2016 was as follows: As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $110,000, and 1819C, with total direct labour charges of $390,000. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $220,000, and for 1819C they amounted to $420,000. Total charges to the Manufacturing Overhead Control account for the year were $897,000, and direct labour charges made to all jobs amounted to $1,583,600, representing 247,216 direct labour hours. There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $720,000. Sales for the year amounted to $6,201,355: cost of goods sold totalled $3,935,000: and sales, general, and administrative expenses were $1,857,870. The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the company’s practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold. Instructions (a) Calculate the under- or over-applied manufacturing overhead for 2016. (b) Prorate the amount calculated in part (a) based on the ending balances (before prorating) of Work in Process, Finished Goods, and Cost of Goods Sold. (c) Prepare an income statement for the company for the year. The income tax rate is 40%.
Expert Answer
a)
Budget for 2016:
Direct labor=$1,800,000
Manufacturing overhead=$900,000
Applied overhead rate=(900000/1800000)=0.5$ per $ of direct labor cost
Direct labor charges during the year=$1,583,600
Manufacturing Overhead applied=0.5*$1,583,600= $ 791,800
Manufacturing overhead cost incurred=$897,000
Under applied overhead cost=(897000-791800)= $ 105,200
b)Prorating of under applied overhead:
Work in process: CALCULATION OF Work in process balance at the end of the year is given below:
| 1768B | 1819C | Total | |
| Direct labor | $110,000 | $390,000 | $500,000 |
| Direct material | $220,000 | $420,000 | $640,000 |
| Applied overhead(50% of direct labor) | $55,000 | $195,000 | $250,000 |
| Total Work in process | $385,000 | $1,005,000 | $1,390,000 |
Finished goods inventory: Ending finished goods inventory=$720,000
Cost of goods sold:$3,935,000
The under applied overhead cost of $105,200 needed to prorate on work in process , finished goods and cost of goods sold.
CALCULATION OF PRORATING IS GIVEN BELOW:
| PRORATING OF UNDERAPPLIED OVERHEAD | ||||
| A | B | C | D=C*105200 | |
| Amount | Prorate factor calculation | Prorate factor | Prorated amount | |
| Work in process inventory | 1390000 | (1390000/6045000)= | 0.2299421 | $24,190 |
| Finished goods inventory | 720000 | (720000/6045000)= | 0.1191067 | $12,530 |
| cost of goods sold | 3935000 | (3935000/6045000)= | 0.6509512 | $68,480 |
| Total | 6045000 | |||
c)INCOME STATEMENT:
Cost of goods sold=(3935000+68480)= $ 4,003,480
| INCOME STATEMENT | |
| Sales | $6,201,355 |
| Less:Cost of goods sold | $4,003,480 |
| Gross Profit | $2,197,875 |
| Less:Sales, general and admin. Expenses | $1,857,870 |
| Income before taxes | $340,005 |
| Income tax (40%) | $136,002 |
| NET INCOME AFTER TAXES | $204,003 |
