Finlon applies manufacturing overhead to production on the basis of direct-labor cost. (The budgeted direct-labor cost is the company 's practical capacity, in terms of direct-labor hours multiplied by the budgeted direct-labor rate.) Budgeted totals for 2002 for direct labor and manufacturing overhead are $4,200,000 and $5,460,000, respectively. Actual results for the year are as follows:
Direct Materials Used
Indirect Material Used
Selling and Administrative Expenses
Job no. 2077 was completed in January 2002, and there was no work in process at year-end. All jobs produced during 2002 were sold with the exception of Job no. 2143, which contained direct-material costs of $156,000 and direct-labor charges of $85,000. The company charges any under- or over-applied overhead to the cost of goods sold category.
To begin, we start by calculating the predetermined overhead application rate, which is always done before the period begins, by dividing the estimated total manufacturing overhead cost by the estimated total amount of the allocation base. Using the data provided, we find: $5,460,000 / 4,200,000 = 1.3, or 130%.
Next we were asked to calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing
References: Managerial Accounting [VitalSouce bookshelf version]. Retrieved from http://digitalbookshelf.argosy.edu/books/0077588002/id/ch02ufn2