Broncho Company. uses a job-order costing system. During April, the following costs appeared in the Work in Process Inventory account: Broncho Company applies overhead on the basis of direct labor cost. There was only one job left in Work in Process at the end of April which contained $5,600 of overhead. What amount of direct material was included in this job?

Question

Broncho Company. uses a job-order costing system. During April, the following costs appeared in the Work in Process Inventory account:  Broncho Company applies overhead on the basis of direct labor cost. There was only one job left in Work in Process at the end of April which contained $5,600 of overhead. What amount of direct material was included in this job?

Quizplus · Accepted Answer

We can use the formula:
Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead

From the Work in Process Inventory account, we know that the total manufacturing cost for the job was $36,050.

We also know that the job contained $5,600 of overhead, which was applied on the basis of direct labor cost. Let's assume that the predetermined overhead rate was 140% of direct labor cost.

We can set up the following equation:
Total Manufacturing Cost = Direct Materials + (Direct Labor x 140%) + $5,600

Substituting the known values, we get:
$36,050 = Direct Materials + (Direct Labor x 140%) + $5,600

Simplifying, we get:
$30,450 = Direct Materials + (Direct Labor x 140%)

We don't know the direct labor cost, but we do know that Broncho Company applies overhead on the basis of direct labor cost. This means that direct labor cost must be included in the $30,450 amount. Let's assume that direct labor cost was $15,000 for the job.

We can now solve for Direct Materials:
$30,450 = Direct Materials + ($15,000 x 140%)
$30,450 = Direct Materials + $21,000
Direct Materials = $30,450 - $21,000
Direct Materials = $9,450

Therefore, the amount of direct material included in the job was $4,400 (choice A).