Question

Following is information about consulting jobs for a company that is increasing in sales, but has not yet become profitable. The owner keeps financial records on yellow sticky notes stuck to the wall behind his desk. He has asked you to help him set up a costing system so that he can better understand his costs. The owner said that job 140 was completed, job 141 was started and completed, and job 142 was started this month. Professional labour hours for contracts in process consist of job 140 with 129 hours, job 141 with 258 hours, and job 142 with 137 hours. Professional labour was paid $23,580 for the month, and the professional employees are all paid the same rate per hour. Overhead is allocated using an estimated rate based on professional labour hours. The total cost for job 141 is $32,766. Actual overhead cost for the month was $53,448. What is labour paid per hour? Labour per hour. What is the estimated rate per labour hour used to allocate overhead? per hour. Overhead rate What are the total costs (before adjusting for overapplied or underapplied overhead) for Jobs 141, 142, and 143? Total cost Job 140 Job 141 Job 142 What are the amounts in cost of goods sold and work-in-process at the end of the month? Cost of goods sold Work-in-process What amount of overhead was overapplied or underapplied this month? Overhead If this month is typical, what is a reasonable overhead rate? Reasonable overhead rate per hour

Answer 1

Answer:

Part 1

$82 per professional labor hour

Part 2

Job 141 = $16,383  ,Job 142 = $32,766 , and Job 143 = $17,399

Part 3

Cost of Goods Sold = $49,149

Ending Work In Process Inventory = $17,399

Part 4

Overheads Under- applied = $10,480

Part 5

$102.00 per professional labor hour

Explanation:

Labor Cost per hour = Total Cost ÷ Total hours

                                  = $23,580 ÷ ( 129 + 258 + 137)

                                  = $45.00 per hour

We know that,

Overhead allocation rate = Estimated Overhead Costs ÷ Estimated Professional labor hours

But using Job 141 we can solve as,

Total for Job  141                                         = $32,766

Less Labor Cost (258 hours × $45.00)       =  $11,610

Overheads allocated to Job 141                 = $21,156

Then,

Overhead allocation rate =  $21,156 ÷ 258

                                          = $82 per professional labor hour

Total Costs

                                          Job 140         Job 141            Job 142

Direct Labor                        $5,805         $11,610              $6,165

Overheads                         $10,578         $21,156            $11,234

Total Cost                           $16,383       $32,766           $17,399

Cost of Goods Sold

Note : Only Finished Jobs are accounted in this figure

Total Cost of Job 140      $16,383

Total Cost of Job 141       $32,766

Cost of Goods Sold         $49,149

Work In Process Inventory

Note : Only Incomplete Jobs are accounted in this figure

Total Cost of Job 142       $17,399

Application of Overheads

Actual Overheads (given)                                  = $53,448

Applied Overheads ($82 ×  ( 129 + 258 + 137)) = $42,968

Actual Overheads > Applied Overheads therefore we have an Under-applied situation.

Overheads Under- applied = $10,480 ($53,448 - $42,968)

Reasonable Overhead Rate.

Rate that does not produce variances is reasonable !

Reasonable Overhead Rate. = Actual Overheads ÷ Total Professional Hours

                                                = $53,448 ÷ 524 hours

                                                = $102.00 per professional labor hour