Case DIscussion (Module 2) Managerial Accounting

Part B: Application of Job Order Costing

Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year:

Machine-hours ...............................

95,000

Manufacturing overhead cost ........

$1,710,000

During the most recent year, a severe recession in the company’s industry caused a buildup of inventory in the company’s warehouses. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours .............................................................................

75,000

Manufacturing overhead cost ......................................................

$1,687,500

Amount of applied overhead in inventories at year-end:

Work in process ........................................................................

$337,500

Finished goods ..........................................................................

$253,125

Amount of applied overhead in cost of goods sold ..................

$759,375

Required:

a. Compute the company's predetermined overhead rate for the year and the amount of underapplied or overapplied overhead for the year.

b. Determine the difference between net operating income for the year if the underapplied or overapplied overhead is allocated to the appropriate accounts rather than closed directly to Cost of Goods Sold.