Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 33

Journal Entries

Erkens Company uses a job costing system with normal costing and applies factory overhead on the basis of machine-hours. At the beginning of the year, management estimated that the company would incur $1,980,000 of factory overhead costs and use 66,000 machine-hours. Erkens Company recorded the following events during the month of April:

a. Purchased 180,000 pounds of materials on account; the cost was $5.00 per pound.

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b. Issued 120,000 pounds of materials to production of which 15,000 pounds were used as indirect materials.

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c. Incurred direct labor costs of $240,000 and $40,000 of indirect labor costs.

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d. Recorded depreciation on equipment for the month, $75,700.

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e. Recorded insurance costs for the manufacturing property, $3,500.

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f. Paid $8,500 cash for utilities and other miscellaneous items for the manufacturing plant.

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g. Completed Job H11 costing $7,500 and Job G28 costing $77,000 during the month and transferred them to the Finished Goods Inventory account.

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h. Shipped Job G28 to the customer during the month. The job was invoiced at 35 percent above cost.

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i. Used 7,700 machine-hours during April.

Required

1. Compute Erkens Company’s predetermined overhead rate for the year.

2. Prepare journal entries to record the events that occurred during April.

3. Compute the amount of overapplied or underapplied overhead and prepare a journal entry to close overapplied or underapplied overhead into cost of goods sold on April 30.

Step 1 of 12

Predetermined Overhead rate:

Predetermined overhead rate is useful to apply manufacturing overhead to work in process inventory. Usually this predetermined overhead rate will be calculated at the beginning of the period. This rate is used to charge overhead costs to a particular job.

Predetermined overhead rate will calculate by using following formula: