The following cost data relate to the manufacturing activities of the Kanaba Company last year:

Manufacturing overhead costs:

Property taxes ........................................................ $ 1,500

Utilities, factory ..................................................... 2,500

Indirect labor .......................................................... 5,000

Depreciation, factory ............................................. 12,000

Insurance, factory ................................................... 3,000

Total ....................................................................... $24,000

Other costs incurred:

Purchases of direct materials ................................. $16,000

Direct labor cost ..................................................... $20,000

Inventories:

Direct materials, January 1 .................................... $4,000

Direct materials, December 31 .............................. $3,500

Work in process, January 1 .................................... $3,000

Work in process, December 31 .............................. $3,750

The company uses a predetermined overhead rate to apply manufacturing overhead cost to
production. The rate last year was $5.00 per machine-hour; a total of 5,000 machine-hours were
recorded for the year.

Required:

a. Compute the amount of under- or overapplied overhead cost for the year.

b. Prepare a schedule of Cost of Goods Manufactured for the year.

Answer:

a. Actual total manufacturing overhead cost ....................... $24,000

Manufacturing overhead applied: 5,000 × $5.00 = ......... 25,000

Overapplied manufacturing overhead ............................. $ (1,000)

b. Kanaba Company

Statement of Cost of Goods Manufactured

For the year ended December 31

Direct materials:

Direct materials inventory, January 1 .......................... $ 4,000

Add purchases of direct materials ................................ 16,000

Direct materials available for use ................................. 20,000

Deduct direct materials inventory, December 31 ......... 3,500

Direct materials used in production ................................ 16,500

Direct labor ...................................................................... 20,000

Overhead cost applied to work in progress ..................... 25,000

Total manufacturing costs ............................................... 61,500

Add work in process, January 1 ...................................... 3,000

64,500

Deduct work in process, December 31 ........................... 3,750

Cost of goods manufactured ............................................ $60,750

117. Testor Products uses a job-order costing system with a predetermined overhead rate

based on machine-hours. The company closes out any under- or overapplied overhead to Cost of Goods
Sold.

Required:

If overhead is overapplied, what adjustment does the company make to Cost of Goods

Sold? Is Cost of Goods Sold increased or decreased? Why?

Answer:

If overhead is overapplied, too much overhead has been applied to inventories and

they are therefore over costed. Since these excess costs flow through to Cost of Goods

Sold when finished goods are sold, it is necessary to reduce Cost of Goods Sold in

order to eliminate this overstatement of costs.