(LO 3, 5) Cardella Company applies overhead on the basis of direct labor costs. The company estimates annual overhead costs will be $760,000 and annual direct labor costs will be $950,000. During February, Cardella works on two jobs: A16 and B17. Summary data concerning these jobs are as follows.

Question

(LO 3, 5) Cardella Company applies overhead on the basis of direct labor costs. The company estimates annual overhead costs will be $760,000 and annual direct labor costs will be $950,000.

During February, Cardella works on two jobs: A16 and B17. Summary data concerning these jobs are as follows.

Manufacturing Costs Incurred
Purchased $54,000 of raw materials on account.
Factory labor $76,000, plus $4,000 employer payroll taxes.
Manufacturing overhead incurred exclusive of indirect materials and indirect labor $59,800.

Assignment of Costs

Direct materials:	Job A16 $27,000, Job B17 $21,000
Indirect materials:	$3,000
Direct labor:	Job A16 $52,000, Job B17 $26,000
Indirect labor:	$2,000

The company completed Job A16 and sold it on account for $150,000. Job B17 was only partially completed.

Instructions
a. Compute the predetermined overhead rate.
b. Journalize the February transactions in the sequence followed in the chapter.
c. What was the amount of under- or overapplied manufacturing overhead?

Compute predetermined overhead rate, apply overhead, and calculate under- or overapplied overhead.

Accepted Answer

a.

[latex]\begin{array}{lcccc}\begin{array}{c} ext { Estimated annual }\ ext { overhead rate }\end{array} & \div & \begin{array}{c} ext { Estimated annual }\ ext{operating activity}\end{array} & = &\begin{array}{c} ext { Predetermined }\ \ ext { overhead rate }\end{array} \\quad\ ext { \$760,000 } & \div & ext { \$950,000 } & = & 80 \%\end{array}[/latex]

b.

	(1)
Feb. 28	Raw Materials Inventory	54,000
	Accounts Payable		54,000
	(Purchase of raw materials on account)
	(2)
28	Factory Labor	80,000
	Factory Wages Payable		76,000
	Employer Payroll Taxes Payable		4,000
	(To record factory labor costs)
	(3)
28	Manufacturing Overhead	59,800
	Accounts Payable, Accumulated
	Depreciation, and Prepaid Insurance		59,800
	(To record overhead costs)
	(4)
28	Work in Process Inventory	48,000
	Manufacturing Overhead	3,000
	Raw Materials Inventory		51,000
	(To assign raw materials to production)
	(5)
28	Work in Process Inventory	78,000
	Manufacturing Overhead	2,000
	Factory Labor		80,000
	(To assign factory labor to production)
	(6)
28	Work in Process Inventory	62,400
	Manufacturing Overhead		62,400
	(To assign overhead to jobs— 80% × $78,000)
	(7)
28	Finished Goods Inventory	120,600
	Work in Process Inventory		120,600
	(To record completion of Job A16: direct materials $27,000, direct labor $52,000, and manufacturing overhead $41,600)
	(8)
28	Accounts Receivable	150,000
	Sales Revenue		150,000
	(To record sale of Job A16)

28	Cost of Goods Sold	120,600
	Finished Goods Inventory		120,600
	(To record cost of sale for Job A16)

c. Manufacturing Overhead has a debit balance of $2,400 as shown below.

Manufacturing Overhead
(3) 59,800	(3) 62,400
(3) 3,000
(3) 2,000
Bal. 2,400

Thus, manufacturing overhead is underapplied for the month.

Question 2.PP: (LO 3, 5) Cardella Company applies overhead on the basis of ...

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