Sampson Company uses a job order cost system with overhead applied based on direct labor hours. See estimated amounts below. Note the beginning balances for Finished Goods (Job 101) and Work-in-Process (Jobs 102 & 103) for the costs accumulated to date. Also note, the beginning balances in the other balance sheet accounts. Estimated Overhead for 2014 720,000 Estimated Direct Labor Hours for 2014 24,000 During January the company had the following transactions: (a) Purchased raw materials on account in the amount of: (b) Issued the following materials into production: Amount Explanation 7,000 Job 102 Job 103 2,000 Used on both jobs. Direct materials Indirect materials Total (c) Recorded salaries and wages as follows: Amount Explanation 10,000 Job 102 Job 103 4,000 For factory supervision 5,000 For administrative staff Indirect labor Salaries Total 19,000 Applied overhead to jobs based on the number of direct labor hours required Job Number Job 102 Job 103 Direct labor hours Total (e) Total Total 16,000 Amount Explanation 2,000 Advertising paid in cash 3,000 Office equipment 1,000 Miscellaneous expense incurred but not paid. 6,000 55,000 30,000 Completed Job 102 but did not sell it; Job 103 is still in process at year-end. Required: 1 Amount Explanation 6,000 Paid factory rent in cash 5,000 Factory equipment 3,000 Had one month of factory insurance policy expire 2,000 Received factory utility bill but did not pay it. Sold Job 101, which is recorded in Finished Goods: Sales Price Cost (h) 500 Recorded the following general and administrative costs: Advertising Depreciation Other expenses (g) 300 200 Recorded the following actual manufacturing costs: Rent Depreciation Insurance Utilities (f) 2,000 5,000 9,000 Direct labor (d) 10,000 Compute the predetermined overhead rate. 6,000 4,000 Predetermined overhead rate 2 Compute how much overhead would be applied to jobs during the period: Overhead applied 3 Compute the total cost of Jobs 102 and 103 at the end of the period. You will enter your calculation in the ‘Ledger Accounts’ tab of this workbook. Where will the cost of each of these jobs appear on the Balance sheet? 4 Post the journal entries to the ‘T’ Accounts in the ‘Ledger Accounts’ tab. Calculate the ending balances in all of the accounts. 5 Calculate the amount of over- or underapplied overhead in the ‘Ledger Accounts’ tab. 6 Post the journal entry in the T accounts to dispose of the overhead balance in the ‘Ledger Accounts’ tab. 7 Prepare a statement of cost of goods manufactured report in the ‘Reports’ tab. 8 Prepare an income statement in the ‘Reports’ tab. 9 Prepare a basic balance sheet in the ‘Reports’ tab. 1/1 Balance Raw Materials Inventory 10,000 Manufacturing Overhead Underapplied Overapplied 1/31 Balance 1/1 Balance Work in Process Inventory 15,000 Beginning Balance add: Direct Materials add: Direct Labor add: Applied OH Job Sheet: Job Sheet: 102 103 15,000 Total Manufacturing Costs 1/31 Balance 1/1 Balance Finished Goods Inventory 30,000 Cost of Goods Sold Unadjusted 1/31 1/31 Balance Adjusted 1/31 Sales Revenue Selling, General, and Administrative Expenses 1/31 Balance 1/1 Balance Cash and Other Assets 100,000 1/31 Balance Payables and Other Liabilities 85,000 1/1 Balance 1/31 Balance 1/31 Balance Stockholders’ Equity 70,000 1/1 Balance 1/31 Balance 7 Sampson Company Cost of Goods Manufactured Report For the Month of January Beginning Raw Materials Inventory Plus: Raw Material Purchases Less: Indirect Material Used Less: Ending Raw Materials Inventory Direct Materials Used in Production Direct Labor Manufacturing Overhead Total Current Manufacturing Costs Plus: Beginning Work in Process Inventory Total Work in Process Process Less: Ending Work in Inventory Cost of Goods Manufactured (a) 8 Sampson Company Income Statement For the Month of January Sales Revenue Less: Cost of Goods Sold Beginning Finished Goods Inventory Plus: Cost of Goods Manufactured (a) Cost of Goods Available for Sale Less: Ending Finished Goods Inventory Unadjusted Cost of Goods Sold Under-/Overapplied Overhead Adjusted Cost of Goods Sold Gross Profit Less: Operating (Period) Expenses Net Income from Operations 9 Sampson Company Balance Sheet As of January 31st Assets Cash and Other Assets Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Liabilities Payables and Other Liabilities Stockholders’ Equity Total Liabilities Total Assets & Stockholders’ Equity
The Correct Answer and Explanation is :
1. Predetermined Overhead Rate
The predetermined overhead rate (POHR) is calculated based on estimated overhead costs and estimated direct labor hours.
- Estimated Overhead for 2014 = $720,000
- Estimated Direct Labor Hours for 2014 = 24,000 hours
POHR = Estimated Overhead / Estimated Direct Labor Hours
POHR = $720,000 / 24,000 hours
POHR = $30 per direct labor hour
This means for every hour of direct labor, $30 will be applied as overhead.
2. Overhead Applied to Jobs
Next, we calculate the applied overhead based on direct labor hours worked on each job. We know that:
- Job 102 requires 10,000 direct labor hours
- Job 103 requires 6,000 direct labor hours
Since the POHR is $30 per direct labor hour:
- Overhead applied to Job 102 = 10,000 hours × $30/hour = $300,000
- Overhead applied to Job 103 = 6,000 hours × $30/hour = $180,000
Thus, the total overhead applied is $480,000.
3. Total Cost of Jobs 102 and 103 at the End of the Period
Now, we can calculate the total costs of Jobs 102 and 103. The total cost of each job includes direct materials, direct labor, and applied overhead:
Job 102:
- Direct Materials: $7,000 (from the materials issued)
- Direct Labor: $10,000 (from the salaries)
- Applied Overhead: $300,000
Total Cost of Job 102 = $7,000 + $10,000 + $300,000 = $317,000
Job 103:
- Direct Materials: $7,000 (from the materials issued)
- Direct Labor: $4,000 (from the salaries)
- Applied Overhead: $180,000
Total Cost of Job 103 = $7,000 + $4,000 + $180,000 = $191,000
4. Over- or Underapplied Overhead
Over- or underapplied overhead is determined by comparing the applied overhead to the actual overhead incurred.
In this case, the actual overhead is:
- Rent: $6,000
- Depreciation: $5,000
- Insurance: $2,000
- Utilities: $9,000
Total actual overhead = $6,000 + $5,000 + $2,000 + $9,000 = $22,000
The applied overhead was $480,000, so:
Over-/Underapplied overhead = Applied overhead – Actual overhead
= $480,000 – $22,000
= $458,000 (Overapplied)
This means that $458,000 of overhead was overapplied.
Conclusion
- POHR = $30 per direct labor hour.
- Overhead applied to Job 102 = $300,000, and Job 103 = $180,000.
- The total cost of Job 102 = $317,000, and Job 103 = $191,000.
- The company has overapplied overhead by $458,000.
These costs will appear on the balance sheet as part of the Work in Process inventory and Finished Goods inventory until the jobs are completed and sold.