ABC Inc. is a small New England company that manufactures custom clocks.

It uses normal
costing system that applies factory overhead on the basis of direct labor-hours. Factory overhead
for the past years were listed below along with the direct labor hours spent:
 
Factory Overhead Direct Labor Hours

549,750 35,000

505,400 36,000

529,800 32,000

592,725 36,500

573,025 38,500
 
Management assessed that 31,700 direct labor-hours is the normal capacity for the year. Before
they started their April production, some P 10,000 of both wood fasteners and mahogany blanks
were still unused but clocks worth 15,780 are ready to be finished. Since the products were on
demand last quarter, all finished clocks were sold before April. These transactions were recorded
during April:
 

 April insurance cost for the manufacturing property and equipment was P1,495. The
premium had been paid in January.
 Recorded P1,025 depreciation on an administrative asset.
 Purchased 21 pounds of high-grade wood fasteners on account at P15 per pound (indirect
material).
 Paid factory utility bill, P6,510 in cash.
 Incurred and paid payroll costs of P80,300. Of this amount, P64,000 were for direct labor
personnel who earned P20 per hour on average.
 Incurred and paid other factory overhead costs, P5,770.
 Purchased 2,100 unfinished mahogany blanks on account at P11 per blank.
 Requisitioned 1,495 mahogany blanks and 13 pounds of fasteners for production.
 Incurred miscellaneous selling and administrative expenses, P5,660.
 Incurred P3,505 depreciation on manufacturing equipment for April.
 Paid advertising expenses in cash, P2,350.
 Applied factory overhead to production on the basis of direct labor-hours.
 Made sales on account in August, P96,450. Cost of goods sold for the period is 84,500.
 Work-in Process at the end of April, before any adjustments for over or under applied
overhead was P56,355.

 
REQUIRED:

1. Compute for the predetermined overhead rate using high-low method.

 2. Journalize the entries for April.
3. Compute for the over- or underapplied overhead and make the necessary adjusting
journal entry if management assessed that it is material.
4. Make an income statement for the month of April for ABC Inc.

Accounting BusinessCost AccountingAMV-COA 4A&B

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Answer & Explanation
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1. Predetermined OH rate is 16.65
2.
  April Entries      All in Peso 

         Debit   Credits 

1 Manufacturing Overhead           

Account 1,495.00 

    Prepaid Insurance           1,495.00 

    To Record insurance cost of      

manufacturing property

           

2 Depreciation      1,025    

    Accumulated Depreciation -      1,025  

Admin Asset

    To record depreciation of      
administrative asset

           

3 Manufacturing Supplies            

315.00 

    Accounts Payable              315.00 

    Record purchase of indirect      

material (P15*21lbs)

           

           

           
4 Accrued Expenses- Utilities         6,510.00   

    Cash       6,510.00 

           

  Manufacturing Overhead         6,510.00   

Account

    Accrued Expenses- Utilities       6,510.00 

           

           

5 Work-in-Process       64,000.00   

  Manufacturing Overhead       16,300.00   

Account

    Salaries and Wages Payable        64,000.00 

           

           

6 Manufacturing Overhead           

Account 5,770.00 

    Miscellaneous Payable          5,770.00 

    Incurred other  FOH       

           

7 Raw materials          23,100.00   

    Accounts Payable        23,100.00 

    Purchase of unfinished mahogany      

blanks (2100*11)

           

8 Work-in-Process          16,445.00   

  Manufacturing Overhead            

Account 195.00 

    Raw materials        16,445.00 

    Manufacturing Supplies              195.00 

    Requisitioned of Mahogany      
(1495*11)

    Requisitioned of Fastener (15*13)      

           

9 Miscellaneous selling and         5,660.00   

administrative expenses

    Miscellaneous Payable       5,660.00 

           

1 Manufacturing Overhead           

0 Account 3,505.00 

    Accumulated Depreciation -        3,505.00 

Manufacturing Equipment

           

1 Work in process          53,280.00   

1

    Manufacturing Overhead Applied        53,280.00 

1 Sales          96,450.00   
2

    Accounts Receivable         96,450.00 

           

  Cost of Goods Sold      84,500.00  

    Finished Goods      84,500.00

3. Overapplied Overhead by P19,505. Amount is material so need to be allocated between, WIP,
Finished Goods and Cost of Goods Sold
 
Allocation of   Allocation
Overhead

  Over applied OH         19,505.00 

  Cost of Goods 84,500.00       11,024.20 

Sold
   Finished Goods                                                        1,128.51 
8,650.00 

  WIP End                                                                                           56,355.00          7,352.29 

  Total 149,505.00  
4.
 ABC Inc     

 Income Statement   

 For the month of April   

     

     In PHP 

Sales                               96,450.00 

Cost of Goos Sold 84,500.00  

Overapplied OH  - 11,024.20                              73,475.80 

Gross Margin                               22,974.20 

     

Depreciation Expense                           
 
 1,025  

Other Selling and Administrative Expenses                     5,660.00 

Total                                  5,660.00 

     

Net Income                               17,314.20 

Step-by-step explanation
1. 
High and low method is one method used to separate between variable and fixed cost.
Since overhead is mixed of variable and fixed we need to determine each by using the High and low
method

           

           

           
 Variable portion = Cost of Highest Activity - Cost of Lowest Activity

    Driver of Highest Activity - Driver of Lowest Activity

           

  =  573,025-529,800       

     38,500- 32,000       

           

  = 43225      

    6500      

           

  = $6.65 per hour      

           

Fixed Portion = 529800 - (6.65*32000)      

    $317000      

           

           

           

Predetermined OH = Budgeted Overhead      

    Allocation Base      

           

  = (6.65*31700)+317000      

    31700      

           

  = $16.65 per hour      

 
 
3.
    Manufacturin 3200*16.65 53280
g OH applied
         

         

    Manufacturing Overhead  
Account

      Insurance                                               
1,495.00 

      Utilities                                               
6,510.00 

      Indirect                                              
Labor 16,300.00 

      Other FOH                                               

5,770.00 

      Indir+J77ect                                                 
Material 195.00 

      Depreciation                                               
of 3,505.00 
manufacturin
g equipment

      Total                                              
33,775.00 

         

    Manufacturin Manufacturin                                                                                          
g OH Actual g OH Actual 33,775.00 

      Manufacturin                                                                                          
g OH 53,280.00 
Applied

      Overapplied                                              
OH 19,505.00 

         

         

      The amount is material so this needs to be allocated between WIP, Finished

Inventory and Cost of Goods Sold

      If in case its not material then the same can just be disposed in cost of goods
 sold
 
  Work in    
Process

  Beg                                                                                            15,780.00   

  Added this                                                                                         133,725.00   

period

  WIP End                                                                                           56,355.00   

  Transferred                                                                                           93,150.00   
to Finished
Goods

       

Allocation of   Allocation
Overhead

  Over         19,505.00 
applied OH

  Cost of 84,500.00       11,024.20 

Goods Sold

  Finished                                                        1,128.51 

Goods 8,650.00 

  WIP End                                                                                           56,355.00          7,352.29 

  Total 149,505.00