Exercise 1 Lola Corp. uses a job order cost system. The overhead is applied to jobs on the basis of direct labor cost. At the beginning of the most recent period, the company estimated its total direct labor cost to be $42,000 and its total manufacturing overhead cost to be $75,600. Several incomplete general ledger accounts showing the transactions that occurred during the most recent accounting period follow:

Raw meterial Beg 10000 (debit) Purchase 85,000 (deibit) end 18,500 (debit)

WIP Beg 30,000 (debit) End 20,000 (debit)

F/G Beg 60,000 (debit) End 40,000 (debit)

OH IM 10,000 (debit)

Factory rent 12,000 (debit)

Facility utlities 5,000 (debit)

Sales 300000 (credit)

Additional information:

a. Payroll costs: - $35,000 for assembly workers - 20,000 for factory supervision - 12,000 for administrative personnel - 28,000 for sales commissions

b. Depreciation: $13,000 for factory machines and $25,000 for the copier used in the administrative office.

c. $10,000 of expired insurance. Sixty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.

d. Paid $8,000 in other factory costs in cash.

Required: [show all your calculations to receive full points]

1. Prepare a schedule of cost of goods manufactured (use the format provided in the Excel file). Hint: complete the above T-Accounts using the additional information section. No need to prepare journal entries. Please note that the given ending balances are accurate. Do not modify them.

2. Prepare a GAAP income statement Beg $ 10,000 Beg $ 30,000 Beg $ 60,000 Purchase $ 85,000 End $ 18,500 End $ 20,000 End $ 40,000 Indirect Material $ 10,000 $310,000 Factory Rent $ 12,000 Factory Utilities $ 5,000 Raw Material WIP F/G OH COGS Sales 2

3. How does a company decide on an allocation base to use in applying manufacturing overhead? What factors should be considered?

4. What are some reasons (list at least 3) why overhead might be overapplied?

5. Why do manufacturing firms apply overhead to job using a predetermined overhead rate?

6. Allocating OH fixed costs creates lots of problems. Please identify some of the problems and explain why corporations use accounting systems that allocate fixed costs to products on a per unit basis.