(Solved): Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhea

P3-34A Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the years overhead and relating it to direct labour costs. The budget for 2016 was as follows: Direct labour Manufacturing overhead $1,800,000 900,000 S,715,00 As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $110,000, and 1819C, with total direct labour charges of $390,000. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $220,000, and for 1819C they amounted to $420,000. Total charges to the Manufacturing Overhead Control account for the year were $897,000, and direct labour charges made to all jobs amounted to $1,583,600, representing 247,216 direct labour hours. There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $720,000. Sales for the year amounted to $6,201,355; cost of goods sold totalled $3,935,000, and sales, general, and administra- tive expenses were $1,857,870. The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the companys practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold Instructions (a) Calculate the under-or over-applied manufacturing overhead for 2016 (b) Prorate the amount calculated in part (a) based on the ending balances (before prorating) of Work in Process, Finished DoD Goods, and Cost of Goods Sold. (e) Prepare an income statement for the company for the year. The inc ome tax rate is 40% (adapted from CMA Canada, now CPA Canada)

Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the years overhead and relating it to direct labour costs. The budget for 2016 was as follows: As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $110,000, and 1819C, with total direct labour charges of $390,000. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $220,000, and for 1819C they amounted to $420,000. Total charges to the Manufacturing Overhead Control account for the year were $897,000, and direct labour charges made to all jobs amounted to $1,583,600, representing 247,216 direct labour hours. There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $720,000. Sales for the year amounted to $6,201,355: cost of goods sold totalled $3,935,000: and sales, general, and administrative expenses were $1,857,870. The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the company’s practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold. Instructions (a) Calculate the under- or over-applied manufacturing overhead for 2016. (b) Prorate the amount calculated in part (a) based on the ending balances (before prorating) of Work in Process, Finished Goods, and Cost of Goods Sold. (c) Prepare an income statement for the company for the year. The income tax rate is 40%.

Expert Answer

 

a)Overhead rate =Overhead /Direct labor cost estimated

= 900000/1800000

= .50 or50 % of direct labor cost

Actual overhead : 897,000

Applied overhead : Actual direct labor cost *overhead rate

= 1583600*.50

= $ 791800

overhead underapplied =Actual -applied

= 897000 – 791800

= $ 105,200

b) Work in process : cost of job1768B + COst of job1819c

= [220000+110000+(110000*.50)]+[420000+390000+(390000*.50)]

= 385000+1005000

= $ 1390000

Amount % of allocation underapplied Overhead allocation
Work in process 1390000 1390000/6045000=.2299 105200*.2299 =$ 24186(approx 24185)
Finished goods inventory 720000 720000/6045000= .1191 .1191*105200=$12529.32 (Approx 12529)
Cost of goods sold 3935000 3935000/6045000=.6510 .6510*105200= 68485.20 (approx 68485)
6045000 105200

c)

Income statement for the period ending 2016
sales 6,201,355
Less:adjusted costof goods sold [3935000+68485] 4,003,485
Gross margin 2,197,870
Less:operating expense
sales ,general and administration expense -1,857,870
Income befor tax 340000
less:Tax [340000*.40] -136000
Net income 204000
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