Question

Wixis Cabinets makes custom wooden cabinets for high-end stereo systems from specialty woods. The company uses a job-order costing system. The capacity of the plant is determined by the capacity of its constraint, which is time on the automated bandsaw that makes finely beveled cuts in wood according to the preprogrammed specifications of each cabinet. The bandsaw can operate up to 186 hours per month. The estimated total manufacturing overhead cost at capacity is $15,066 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $81 per hour of bandsaw useThe results of a recent month's operations appear below:Sales $43,700Beginning inventories $0Ending inventories $0Direct materials $5,340Direct labor (all variable) $8,810Manufacturing overhead incurred $14,290Selling and administrative expense $8,210Actual hours of bandsaw use 153a. By how much would overhead have been underapplied or overapplied?b. Prepare an income statement in which any over/underapplied overhead is directly recorded on the income statement as an expense .

Answer 1

Answer:

a. $2,673 over applied

Explanation:

a. Remember, it was mentioned that the company's predetermined overhead rate is $81 per hour of bandsaw use, although the actual hours of bandsaw use 153.

Calculating the results we have $2,673 over applied (actual value= $81*153-$15,066).

b. In preparing an income statement all underapplied overhead would be recorded as a prepaid expense on the balance sheet and then corrected through increasing cost of goods sold at the end of the time period.