Chaos Manufacturing had the following financial information for the year ended December 31, 2019:

Inventory Balances: Beginning Ending

Work in Progress $ 90,000 $ 60,000

Finished Goods $ 57,000 $ 67,000

Raw Materials $ 10,000 $ 20,000

During the year, the budgeted and actual costs were as follows:

	Note	Budget	Actual
Raw Materials	1	200,000	See note 1
Labour	2	440,000	418,000
Depreciation Factory Equipment		72,000	72,000
Depreciation Office Equipment		24,000	23,000
Building Rent	3	100,000	100,000
Maintenance Factory Equipment		64,000	40,000
Utilities Electrical	4	200,000	180,000
Sales Commissions		40,000	46,000
Advertising		25,000	20,000
Shipping	5	20,000	17,000

Sales for the year were $1,500,000

Note 1 Raw material

Budget: 90% of raw materials are traced directly to specific jobs, and the remaining 10% of raw materials are related to production but are untraceable to specific jobs

Actual: during the year $20,000 worth of materials were untraceable, and the rest were directly traced and applied to WIP

Note 2 Labour

Budget:

Direct Labour $200,000 + Factory Salaries $80,000 + Sales and Marketing Salaries $160,000 = $440,000

Actual:

Direct Labour $170,000 + Factory Salaries $85,000 + Sales and Marketing Salaries $163,000 = $418,000

Note 3 Building Rent

The building is all for the manufacturing facility

Note 4 Utilities Electrical

For both budget and actual costs, 90% of these costs are related to the factory, and 10% of these costs are related to the administrative office.

Note 5 Shipping

Budget: 20% of budgeted shipping costs were for the delivery of raw materials to the manufacturing facility, and the remaining 80% of the shipping costs are for the delivery of finished goods to customers.

Actual: All of the shipping costs were for the deliver of finished goods to customer.

Note 6 Overhead

The manufacturer uses Normal Costing. Overhead is allocated based on Direct Labour costs.

The company is unsure how to treat under/over applied overhead.

Required:

Prepare an income statement. You may include a schedule of Cost of Goods Manufactured and Cost of Goods Sold as part of the Income Statement or as separate schedules.

Explain which options the company can use to allocated allocate under/over applied overhead. Identify which option you chose and why it was chosen.