Chapter 3, Problem 45P

Stellar Sound, Inc. which uses a job-order costing system, had two jobs in process at the start of 20x1: job no. 64 ($84,000) and job no. 65 ($53,500). The following information is available:

1. a. The company applies manufacturing overhead on the basis of machine hours (based on practical capacity). Budgeted overhead and machine activity for the year were anticipated to be $840,000, and 16,000 hours, respectively.
2. b. The company worked on four jobs during the first quarter. Direct materials used, direct labor incurred, and machine hours consumed were as follows:
3. c. Manufacturing overhead during the first quarter included charges for depreciation ($34,000), indirect labor ($60,000), in direct materials used ($5,000), and other factory costs ($139,500).
4. d. Stellar Sound completed job no. 64 and job no. 65. Job no. 65 was sold on account, producing a profit of $34,700 for the firm.

Required:

1. 1. Determine the company’s predetermined overhead application rate.
2. 2. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where appropriate by combining individual job data.)
   1. a.      The issuance of direct material to production and the direct labor incurred.
   2. b.      The manufacturing overhead incurred during the quarter.
   3. c.       The application of manufacturing overhead to production.
   4. d.      The completion of jobs no. 64 and no. 65.
   5. e.       The sale of job no. 65.
3. 3. Determine the cost of the jobs still in production as of March 31.
4. 4. Did the finished-goods inventory increase or decrease during the first quarter? By how much?
5. 5. Was manufacturing overhead under- or over applied for the first quarter of the year? By how much?

To determine

Calculate the predetermined overhead application rate for Incorporation SS.

Explanation of Solution

Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials.

Calculate the predetermined overhead application rate for Incorporation SS.

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Budgeted overhead}}{\text{Budgeted machine hours}}\\ =\frac{\$840,000}{16,000}\\ =\$52.50\text{ per machine hour}\end{array}$

Thus, the predetermined overhead application rate for Incorporation SS is $52.50 per machine hour.

To determine

Prepare the journal entry for March 31.

Explanation of Solution

Job order costing: Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

1. a. Prepare the journal entry to record the issuance of direct material to production and the direct material.

Date	Account title and explanation	Debit ($)	Credit ($)
	Work-in-process inventory $\left(\$21,000+\$44,000+\$15,000\right)$	80,000
	Raw-material inventory		80,000
	(To record the issuance of direct materials to production)

Table (1)

Date	Account title and explanation	Debit ($)	Credit ($)
	Work-in-process inventory $\left(\$35,000+\$22,000+\$65,000+\$8,800\right)$	130,800
	Wages payable		130,800
	(To record the direct labor incurred)

Table (2)

1. b. Prepare the journal entry to record the manufacturing overhead incurred during the quarter.

Date	Account title and explanation	Debit ($)	Credit ($)
	Manufacturing overhead	238,500
	Accumulated depreciation		34,000
	Wages payable		60,000
	Manufacturing supplies inventory		5,000
	Miscellaneous accounts		139,500
	(To record the manufacturing overhead incurred during the year)

Table (3)

1. c. Prepare the journal entry to record the application of manufacturing overhead to production.

Date	Account title and explanation	Debit ($)	Credit ($)
	Work-in-process inventory (1)	231,000
	Manufacturing overhead		231,000
	(To record the application of manufacturing overhead to production)

Table (4)

Working note (1):

Calculate the amount of manufacturing overhead applied to production.

$\begin{array}{c}\text{Work-in-process inventory}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Machine hours for Job 64}+\text{Machine hours for Job 65}+\\ \text{Machine hours for Job 66}+\text{Machine hours for Job 67}\end{array}\right)\times \\ \text{Predetermined overhead rate}\end{array}\right]\\ =\left[\left(1,200+700+2,000+500\right)\times \$52.50\right]\\ =\$231,000\end{array}$

1. d. Prepare the journal entry to record the completion of Job no. 64 and Job no. 65.

Date	Account title and explanation	Debit ($)	Credit ($)
	Finished goods inventory (2)	315,250
	Work-in-process inventory		315,250
	(To record the completion of Job no.64 and Job no.65)

Table (5)

Working note (2):

Step 1: Calculate the amount of job completed in Job no. 64.

$\begin{array}{c}\text{Amount of job completed in Job no}\text{.64}=\left[\begin{array}{l}\text{Amount of job in process in Job}\text{. no 64}+\\ \text{Direct material}+\text{Direct labor}+\\ \left(\text{Machine hours}\times \text{Predetermined overhead rate}\right)\end{array}\right]\\ =\left[\$84,000+\$21,000+\$35,000+\left(1,200\times \$52.50\right)\right]\\ =\$203,000\end{array}$

Step 2: Calculate the amount of job completed in Job no. 65.

$\begin{array}{c}\text{Amount of job completed in Job no}\text{.65}=\left[\begin{array}{l}\text{Amount of job in process in Job}\text{. no 65}+\\ \text{Direct material}+\text{Direct labor}+\\ \left(\text{Machine hours}\times \text{Predetermined overhead rate}\right)\end{array}\right]\\ =\left[\$53,500+\$0+\$22,000+\left(700\times \$52.50\right)\right]\\ =\$112,250\end{array}$

Step 3: Calculate the amount of finished goods inventory.

$\begin{array}{c}\text{Finished goods inventory}=\left(\begin{array}{l}\text{Total amount of job completed in Job no}\text{. 64}+\\ \text{Total amount of job completed in Job no}\text{.65}\end{array}\right)\\ =\$203,000+\$112,250\\ =\$315,250\end{array}$

1. e. Prepare the journal entry to record the sale of Job no.65.

Date	Account title and explanation	Debit ($)	Credit ($)
	Accounts receivable $\left(\$112,250+\$34,700\right)$	146,950
	Sales revenue		146,950
	(To record the sale of Job no. 65)
	Cost of goods sold	112,250
	Finished goods inventory		112,250
	(To record the cost of goods sold)

Table (6)

To determine

Calculate the cost of the jobs that are in work-in-process as of March 31.

Explanation of Solution

Calculate the cost of the jobs that are in production as of March 31.

Particulars	Calculation	Amount ($)	Amount ($)
Job no 66.	$\left[\$44,000+\$65,000\left(2,000\times \$52.50\right)\right]$	$214,000
Job no 67.	$\left[\$15,000+\$8,800\left(500\times \$52.50\right)\right]$	$50,050
Total			$264,050

Table (7)

The cost of the jobs that are in production as of March 31 is $264,050.

To determine

Identify whether there is an increase or decrease in the finished goods inventory during the first quarter.

Explanation of Solution

During the first quarter, the finished goods inventory has increased. The total amount increased during the first quarter is $203,000$\left(\$315,250-\$112,250\right)$.

To determine

Identify whether the manufacturing overhead is over applied or under applied for the first quarter of the year.

Explanation of Solution

Underapplied overhead:

When there is a debit balance in the manufacturing overhead account during the month end, it indicates that overheads applied to jobs are less than the actual overhead cost incurred by the business. Therefore, the debit balance in the manufacturing overhead account is referred to as underapplied overhead.

Over-applied overhead:

When there is a credit balance in the manufacturing overhead account during the month end, indicates that overheads applied to jobs is more than the actual overhead cost incurred by the business. Therefore, the credit balance in the manufacturing overhead account is referred to as over- applied overhead.

• The actual overhead amounts to $238,500.
• The applied overhead amounts to $231,000
• Hence, the overhead was underapplied by $7,500$\left(\$283,000+\$231,000\right)$.