Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $113,100 of manufacturing overhead for an estimated allocation base of $87,000 direct material dollars to be used in production. The company has provided the following data for the just completed year:
Purchase of raw materials $134,000
Direct labor cost $83,000
Manufacturing overhead costs:
Indirect labor $119,900
Property taxes $8,600
Depreciation of equipment $17,000
Maintenance $13,000
Insurance $7,600
Rent, building $39,000


Beginning Ending
Raw Materials $ 22,000 $ 13,000
Work in Process $ 44,000 $ 36,000
Finished Goods $ 68,000 $ 58,000


Required:
(a) Compute the predetermined overhead rate for the year.
(b) Compute the amount of underapplied or overapplied overhead for the year.

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Overhead is applied based on direct materials used in production.

Its predetermined overhead is $113,100 and $87,000 direct material dollars to be used in production.

1) To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 113,100/87,000= $1.3 per direct material dollar to be used in production.

2) First, we need to calculate the actual direct material used in production. Then, we need to allocate overhead based on direct material. Finally, we will determine the over/under allocation:

Raw materials used in production:

Raw material used= beginning inventory + purchases - ending inventory= 22,000 + 134,000 - 13,000= $143,000

Now, we can allocate overhead:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH= 1.3*143,000= $185,900

To calculate the under/over allocation we need to calculate the overhead incurred in the period:

Manufacturing overhead costs:

Indirect labor $119,900

Property taxes $8,600

Depreciation of equipment $17,000

Maintenance $13,000

Insurance $7,600

Rent, building $39,000

Total= 205,100

Over/under allocation= real MOH - allocated MOH

Over/under allocation= 205,100 - 185,900= 19,200 underallocated