Birmingham Bowling Ball Company (BBBC) uses a job-order costing system to accumulate manufacturing

costs. The company’s work-in-process on December 31, 20x3, consisted of one job (no. 3088), which
was carried on the year-end balance sheet at $78,400. There was no finished-goods inventory on this date.
BBBC applies manufacturing overhead to production on the basis of direct-labor cost. Budgeted
totals for 20x4 for direct labor and manufacturing overhead are $2,100,000 and $2,730,000, respectively.
Actual results for the year follow.

Direct material used ................................................................................................................................ $2,800,000

Direct labor ............................................................................................................................................. 2,175,000
Indirect material used ............................................................................................................................... 32,500
Indirect labor ........................................................................................................................................... 1,430,000
Factory depreciation ................................................................................................................................ 870,000
Factory insurance .................................................................................................................................... 29,500
Factory utilities ........................................................................................................................................ 415,000
Selling and administrative expenses .......................................................................................................... 1,080,000
Total ................................................................................................................................................... $8,832,000
Job no. 3088 was completed in January 20x4; there was no work in process at year-end. All jobs produced
during 20x4 were sold with the exception of job no. 3154, which contained direct-material costs of $78,000 and direct-labor
charges of $42,500. BBBC charges any under- or overapplied overhead to Cost of Goods Sold.

1. Determine the company’s predetermined overhead application rate.

Predetermined overhead rate = budgeted overhead / budgeted direct-labor cost

= 2,730,000 / 2,100,000 = 130% of direct labor cost

2. Determine the additions to the Work-in-Process Inventory account for direct material used, direct
labor, and manufacturing overhead.

The additions would be direct material used, direct labor and applied overhead as the company applies the overhead based on
direct labor cost
Direct material 2,800,000
Direct labor 2,175,000
Applied overhead (2,175,000X130%) 2,827,500
Total 7,802,500

3. Compute the amount BBBC would disclose as finished-goods inventory on the December 31,
20x4, balance sheet.

Job 3154 is in the finished goods inventory at the end of the period. The total cost of the job is
Direct material 78,000
Direct labor 42,500
Overhead applied (42,500X130%) 55,250
Total cost of finished goods ending inventory 175,750

4. Prepare the journal entry needed to record the year’s completed production.

Total cost of goods manufactured is opening WIP + Additions to WIP – ending WIP. Since there is no ending WIP, all items are
finished.
Cost of goods manufactured = 78,400+7,802,500 = 7,880,900
The journal entry is
Finished Goods Inventory Dr 7,880,900
Work in Process Cr 7,880,900

5. Compute the amount of under- or overapplied overhead at year-end, and prepare the necessary
journal entry to record its disposition.

The difference between the actual overhead and the applied overhead is under or over applied. The actual overhead is
Indirect material used ............................................................................................................................... 32,500
Indirect labor ........................................................................................................................................... 1,430,000
Factory depreciation ................................................................................................................................ 870,000
Factory insurance .................................................................................................................................... 29,500
Factory utilities ........................................................................................................................................ 415,000
Total actual overhead = $2,777,000
Overhead applied = Direct labor cost X 130% = 2,175,000X130% = 2,827,500
Since the applied is higher than actual, overhead is over applied by 2,827,500-2,777,000 = $50,500.
BBBC charges the under or over applied to cost of goods sold. Since overhead is over applied there will be a credit balance in the
overhead account. The entry is
Manufacturing Overhead Dr 50,500
Cost of Goods Sold Dr 50,500

6. Determine BBBC’s 20x4 cost of goods sold.

The cost of goods sold = Beginning finished goods inventory + cost of goods manufactured – ending finished goods inventory
+/- adjustment for over/under applied overhead
= 0 + 7,880,900-175,750 – 50,500
= $7,654,650

7. Would it be appropriate to include selling and administrative expenses in either manufacturing

overhead or cost of goods sold? Briefly explain.

It would not be appropriate as these are period costs and so are expensed in the period incurred and cannot be treated as product
costs.
of $78,000 and direct-labor charges of $42,500. BBBC charges any under- or overapplied overhead to