Questions 1. Why must a company prepare a predetermined overhead rate when using job order cost accounting?

P2.

The following information is available for Security Company, which produces special-order security products and uses a job order cost accounting system.

                                                                        April 30           May 31

Inventory Balances:

Raw Materials                                                 $43,000           $52,000

Goods in Process                                            $10,000           $21,000

Finished Goods                                               $63,000           $36,000

Other Information for the Month of May:

Material inventory purchases (paid with cash) were               $210,000

Actual direct materials used during the month                       $186,000

Actual direct labor recorded to jobs during the month          $265,000

Actual factory overhead incurred included:

            Indirect materials                                                        $15,000

            Indirect labor                                                              $80,000

            Other factory overhead                                               $120,000

            Total actual factory overhead                                     $215,000

Other information:

The company uses a traditional costing system and allocates overhead based on a single predetermined overhead rate of 70% of actual direct labor costs.

Sales for the month of May were $1,400,000.

Note: When you have completed this problem, you will calculate the gross profit that the company has earned on the jobs that were completed in the month of May. You will"apply" or allocateoverhead to the jobs based the predetermined overhead rate of 70% or 70% times actual direct labor incurred by the company during the month.

Compute the following amounts for the month of May.

1. Cost of materials used relating to the raw materials inventory account. Hint: This will be calculated in the same manner as we did in chapter 14. Beginning raw materials inventory is the April 30 balance above.

2. CalculateCost of goods manufactured. Hint: Start with Beginning GIP inventory, add DM, DL and ALLOCATED factory overhead then subtract ending GIP inventory to arrive at cost of goods manufactured for the month of May. This calculation is identical to what we did in chapter 14 except that we are now  "applying" or allocating factory overhead using a predetermined overhead rate (rather than recording actual factory overhead as we did in the previous chapter) to the work that was done this month. Check figure: COGM should be a number somewhere between $620,000 and $630,000.

3.CalculateCost of goods sold. Hint: This will be calculated in the same manner as we did in chapter 14. Beginning finished goods inventory is the April 30 balance above. Check figure: COGS sold for the month is a number greater than $650,000 but less than $655,000.

4. Calculate Gross Profit for the month. Calculate gross profit for the month. You better know how to do this. If not, refer back to chapter 4 of the text regarding how to calculate gross profit.

5.  Determine amount ofOverapplied or underapplied overhead. Determine whether the company overapplied or underapplied overhead for the month. Compare actual factory overhead costs incurred during the month verses the total factory overhead that you should have applied during the month.