Question

Marcelino Co.’s March 31 inventory of raw materials is \(80,000. Raw materials purchases in April are \)500,000, and factory payroll cost in April is \(363,000. Overhead costs incurred in April are: indirect materials, \)50,000; indirect labor, \(23,000; factory rent, \)32,000; factory utilities, \(19,000; and factory equipment depreciation, \)51,000. The predetermined overhead rate is 50% of direct labor cost. Job 306 is sold for \(635,000 cash in April. Costs of the three jobs worked on in April follow.

Job 306 Job 307 Job 308

Balances on March 31    

Direct materials . . . . . . . . . . . . . . . \)  29,000 \(  35,000    

Direct labor . . . . . . . . . . . . . . . . . . 20,000 18,000    

Applied overhead . . . . . . . . . . . . . 10,000 9,000

Costs during April    

Direct materials . . . . . . . . . . . . . . . 135,000 220,000 \)100,000    

Direct labor . . . . . . . . . . . . . . . . . . 85,000 150,000 105,000    

Applied overhead . . . . . . . . . . . . . ? ? ?

Status on April 30 . . . . . . . . . . . . . . . Finished (sold) Finished (unsold) In process

Required

1. Determine the total of each production cost incurred for April (direct labor, direct materials, and applied overhead) and the total cost assigned to each job (including the balances from March 31).

2. Prepare journal entries for the month of April to record the following.

a. Materials purchases (on credit).

b. Direct materials used in production.

c. Direct labor paid and assigned to Work in Process Inventory.

d. Indirect labor paid and assigned to Factory Overhead.

e. Overhead costs applied to Work in Process Inventory.

f. Actual overhead costs incurred, including indirect materials. (Factory rent and utilities are paid in cash.)

g. Transfer of Jobs 306 and 307 to Finished Goods Inventory.

h. Cost of goods sold for Job 306.

i. Revenue from the sale of Job 306.

j. Assignment of any underapplied or overapplied overhead to the Cost of Goods Sold account. (The amount is not material.)

3. Prepare a schedule of cost of goods manufactured.

4. Compute gross profit for April. Show how to present the inventories on the April 30 balance sheet. Analysis Component

5. The over- or underapplied overhead is closed to Cost of Goods Sold. Discuss how this adjustment impacts business decision making regarding individual jobs or batches of jobs.

Short answer

The required questions are answered in the solution.

Step-by-step solution

Computation of production cost

	Job 306 ($)	Job 307 ($)	Job 308 ($)	April total ($)
From March
Direct materials	29,000	35,000		64,000
Direct Labor	20,000	18,000		38,000
Applied Overhead	10,000	9,000		19,000
Beginning Goods in Process	59,000	62,000	0	121,000
For April
Direct materials	135,000	220,000	100,000	455,000
Direct Labor	85,000	150,000	105,000	340,000
Applied Overhead	42,500	75,000	52,500	170,000
Total cost added in April	262,500	445,000	257,500	965,000
Total costs (April 30)	321,500	507,000	257,500	1,086,000
Status on April 30	Finished (sold)	Finished (unsold)	In Process
April 20 cost included in	Cost of goods sold	Finished Goods Inventory	Goods in Process Inventory

Journal entries

Date	Particulars	Debit ($)	Credit ($)
	Raw Materials Inventory	500,000
	Accounts Payable		500,000
	WIP Inventory	455,000
	Raw Materials Inventory		455,000
	WIP Inventory	340,000
	Cash		340,000
	Factory Overhead	23,000
	Cash		23,000
	WIP Inventory	170,000
	Factory Overhead		170,000
	Factory Overhead	50,000
	Raw Materials Inventory		50,000
	Factory Overhead	19,000
	Cash		19,000
	Factory Overhead	51,000
	Accumulated depreciation- factory equipment		51,000
	Factory Overhead	32,000
	Cash		32,000
	Finished goods inventory	828,500
	WIP Inventory		828,500
	Cost of goods sold	321,500
	Finished Goods Inventory		321,500
	Cash	635,000
	Sales		635,000
	Cost of goods sold	5,000
	Factory Overhead		5,000

Preparation of schedule of cost of goods manufactured

Schedule of cost of goods manufactured
For the month ended April 30
	Amount ($)
Direct Material Used	455,000
Direct labor used	340,000
Factory overhead Applied	170,000
Total manufacturing cost	965,000
Add: WIP March 31	121,000
Total WIP	1,086,000
Less: WIP, April 30	257,500
Cost of goods manufactured	828,500

Computation of gross profit and representation of inventory

$\begin{array}{c}\mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{=}\mathbf{Sales}\mathbf{-}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}\mathbf{-}\mathbf{Under}\mathbf{}\mathbf{applied}\mathbf{}\mathbf{Overhead}\\ \mathbf{=}\mathbf{635}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{321}\mathbf{,}\mathbf{500}\mathbf{-}\mathbf{5}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{308}\mathbf{,}\mathbf{500}\end{array}$

Inventories
	Amount ($)
Raw Materials (80,000+500,000-455,000-50,000)	75,000
WIP	257,500
Finished Goods	507,000
Total Inventories	839,500

Computation of gross profit and representation of inventory

Expenses that need to be closed to cost of goods sold or shifted to work-in-progress, fixed goods, or COGS are referred to as under-applied overhead. When imposed overhead is less than the real overhead, either insufficient overhead was applied or insufficient cost was charged. If there is an excessive amount of overhead, either batch or individual jobs may be overcharged. As a result, the company's job (and batch) level earnings are overstated.