Problem:
Data for month ending 1/31/200X
Direct labor expended on jobs completed in month 1 $100,000
Direct material used up $500,000
Budgeted manufacturing overhead $2,000,000
Budgeted production volume 4,000 units
Actual production volume 4,500 units
Supplies, indirect labor, maintenance repair costs totaled $2,200,000
Beginning work in process inventory 0
Ending work in process inventory 0
You, the CFO, and the rest of the accounting department now need to write a memo summarizing the data from the first month of using the process costing system operation.
Using only the data above, prepare a 300-400-word memo addressing all of these questions and showing all calculations:
Why is calculating the predetermined overhead rate so important?
Compute the firm's predetermined overhead rate.
What would it mean if you mistakenly used too high a predetermined rate? What would it mean if you mistakenly used too low a predetermined rate?
Compute the proper amount of overhead to apply.
Compute the over- or under applied overhead.
Prepare the journal entries to record the closing-out of the balance in manufacturing overhead to the appropriate accounts, and show any necessary calculations in the notes of the journal entry.