6 Moody Corporation uses a job order costing system with a p

6.       Moody Corporation uses a job- order costing system with a plantwide overhead rate based on machine- hours. At the beginning of the year, the company made the following estimates:

Machine- hours required to support estimated production . . . . . . 100,000

Fixed manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . $ 650,000

Variable manufacturing overhead cost per machine- hour . . . . . $ 3.00

Required:

1.    Compute the predetermined overhead rate.

2.       During the year, Job 400 was started and completed. The following information was available with respect to this job:

Direct materials requisitioned . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450

Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $ 210

Machine- hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      . . 40

Compute the total manufacturing cost assigned to Job 400.

3.   During the year, the company worked a total of 146,000 machine- hours on all jobs and incurred actual manufacturing overhead costs of $ 1,350,000. What is the amount of underap-plied or overapplied overhead for the year? If this amount were closed out entirely to Cost of Goods Sold would the journal entry increase or decrease net operating income?

Solution

1.Predetermined overhead rate= Total fixed cost/Machine hours=$650000/100000=$6.50/hr

2.Total manufacturing cost of the job

Direct Material=$450

Direct Labour=$210

Variable mfr overhead=$3×40=$120

Allocated fixed Mfr overhead=$6.5×40=$260

Total cost=$1040

3.Estimated overhead=$650000

Actually incurred=$1350000

Underapplied overhead during the year=Actual-Estimated=$1350000-$650000=$700000

If this amount is transferred to Cost of goods sold, thereby decreasing the net operating income.Because Cost of goods sold will increase (increase in expenses) which adversely affects the income.

Conclusion: Net operating income will decrease.

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