Sample Problem – Job Order Cost System
ABC Company is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:
Raw materials
Beginning Balance Ending Balance
$26,000 $20,000
Work in process
Finished goods
$71,000
$66,000
$53,000
$81,000
The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work
44,000 machine-hours and incur $176,000 in manufacturing overhead cost. The following transactions were recorded for the year:
Raw materials were purchased, $459,000.
Raw materials were requisitioned for use in production, $465,000 ($431,000 direct and
$34,000 indirect).
The following employee costs were incurred: direct labor, $296,000; indirect labor,
$63,000; and administrative salaries, $157,000.
Selling costs, $134,000.
Factory utility costs, $14,000.
Depreciation for the year was $119,000 of which $114,000 is related to factory operations and $5,000 is related to selling and administrative activities.
Manufacturing overhead was applied to jobs. The actual level of activity for the year was
47,000 machine-hours.
Sales for the year totaled $1,287,000
Required:
Prepare a schedule of cost of goods manufactured in good form.
Was the overhead under- or overapplied? By how much?
Prepare an income statement for the year in good form. The company closes any under- or overapplied overhead to Cost of Goods Sold.

Answer: a. Schedule of cost of goods manufactured
Estimated total manufacturing overhead (a)
Estimated total machine-hours (b)
Predetermined overhead rate (a) ÷ (b)
Actual total machine-hours (a)
Predetermined overhead rate (b)
Overhead applied (a) × (b)
Direct materials:
Raw materials inventory, beginning
Add: purchases of raw materials
Total raw materials available
Deduct: raw materials inventory, ending
Raw materials used in production
Less: indirect materials
Direct materials
Direct labor
Manufacturing overhead applied
Total manufacturing costs
Add: Beginning work in process inventory
Deduct: Ending work in process inventory
Cost of goods manufactured b. Overhead under- or overapplied
Actual manufacturing overhead cost incurred:
Indirect materials
Indirect labor
Factory utilities
Factory depreciation
Manufacturing overhead cost incurred
Manufacturing overhead applied
Underapplied overhead
296,000
188,000
915,000
71,000
986,000
53,000
$933,000
$ 34,000
63,000
14,000
114,000
225,000
188,000
$ 37,000
$176,000
44,000
$ 4.00
47,000
$4.00
$188,000
$ 26,000
459,000
485,000
20,000
465,000
34,000
431,000

c. Income Statement
Beginning finished goods inventory
Cost of goods manufactured
Goods available for sale
Ending finished goods inventory
Unadjusted cost of goods sold
Add: underapplied overhead
Adjusted cost of goods sold
Sales
Cost of goods sold (adjusted)
Gross margin
Less selling and administrative expenses:
Administrative salaries
Selling costs
Depreciation
Net operating income
$ 66,000
933,000
999,000
81,000
918,000
37,000
$955,000
$1,287,000
955,000
332,000
$157,000
134,000
5,000 296,000
$ 36,000