Accounting 225 Quiz Section #5

Chapter 3-2 Class Exercises Solution

1. Babb Company is a manufacturing firm that uses job-order costing. The company's inventory
balances were as follows at the beginning and end of the year:

The company applies overhead to jobs using a predetermined overhead rate based on machinehours. At the beginning of the year, the company estimated that it would work 17,000 machinehours and incur $272,000 in manufacturing overhead cost. The following transactions were
recorded for the year:

Raw materials were purchased, $416,000.

Raw materials were requisitioned for use in production, $412,000 $(376,000 direct and
$36,000 indirect).
The following employee costs were incurred: direct labor, $330,000; indirect labor, $69,000;
and administrative salaries, $157,000.
Selling costs, $113,000.
Factory utility costs, $29,000.
Depreciation for the year was $121,000 of which $114,000 is related to factory operations and
$7,000 is related to selling, general, and administrative activities.
Manufacturing overhead was applied to jobs. The actual level of activity for the year was
15,000 machine-hours.
Sales for the year totaled $1,282,000.
Assume all SG&A expenses are fixed.

Required:
a) Complete a set of T-accounts and record all applicable transactions.
b) Correct for any over/under-applied MOH using the direct write-off method.
Predetermined Rate = 272000/17000 = 16
Raw Materials
BB
11,000
Used in
Purchases 416,000 412,000 Production

EB

BB
COGM

15,000
Finished Goods
108,000
964,000
123,000

949,000

BB
DM
DL
MOH
EB

Plug
Plug Adjustment

WIP
32,000
376,000
330,000
240,000
14,000

964,000

COGM

COGS
949,000
8,000
957,000

Accounting 225 Quiz Section #5

Chapter 3-2 Class Exercises Solution
Admin Salary
Selling Cost

S&A
157,000
113,000

Depreciation

7,000

IM
IL
Fac
Utility
Dep

277,000

MOH
36,000
240,000 (15000*16)
69,000
29,000
114,000
248,000

Under
240,000 Applied
8000 Adjustment

c) Prepare an income statement using the traditional Gross Margin format.

Income Statement
Sales
COGS
Gross Margin
SG&A
Net Operating Income

1282000
-957000
325000
-277000
48000

Alternative Solution for part c:

The other solution to this problem assumes that all COGS are variable. I believe this is an
incorrect portrayal, and that the factory depreciation should be treated as a fixed expense. Using
this assumption your contribution margin format income statement is shown below. Also of
note, you could consolidate the selling, admin, and SG&A depreciation into one line item titled
SG&A expense of $277,000.

Income Statement (CM Format)

Sales
$
1,282,000
VC: Var. Product Costs
$
(843,000)
Contribution Margin
$
439,000
FMOH/Factory
FC: Depreciation
$
(114,000)
Selling exp.
$
(113,000)
Admin exp.
$
(157,000)
SG&A Depreciation
$
(7,000)
Net Operating Income $
48,000

Accounting 225 Quiz Section #5

Chapter 3-2 Class Exercises Solution
2. Alvardo Inc. has provided the following data for the month of November. There were no
beginning inventories; consequently, the direct materials, direct labor, and manufacturing
overhead applied listed below are all for the current month.

Manufacturing overhead for the month was underapplied by $6,000.

The company allocates any underapplied or overapplied manufacturing overhead among work in
process, finished goods, and cost of goods sold at the end of the month on the basis of the
overhead applied during the month in those accounts.
Calculate MOH Applied as %

MOH Applied

WIP
=3840/48000 = 8%

Finished Goods
=7680/48000 = 16%

COGS
=36480/48000 = 76%

a) Provide the journal entry that would record the allocation of underapplied or overapplied
among work in process, finished goods, and cost of goods sold.
WIP
Finished Goods
COGS
MOH

480 (6000 x .08)

960 (6000 x .16)
4560 (6000 x .76)
6000

b) Determine the cost of work in process, finished goods, and cost of goods sold AFTER
allocation of the underapplied or overapplied manufacturing overhead for the period.
WIP
Unadjusted
EB
Allocation of
underapplied
MOH

Finished Goods

COGS

10,600
480

33,280
960

154,880
4,560

11,080

34,240

159,440