During last period, a company's overhead rate was 150% of direct labor cost.This caused factory overhead to be $10,000 overapplied.Use the following incomplete accounts to determine the cost of goods manufactured:

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the cost of goods manufactured:
Direct materials + Direct labor + Factory overhead applied – Ending work in process inventory – Beginning work in process inventory
We are not given information about direct materials or work in process inventory, but we do know that factory overhead was $10,000 overapplied, which means it was applied in excess of the actual amount incurred. Since the overhead rate was 150% of direct labor cost, we can assume that the actual factory overhead cost was less than 150% of direct labor cost. 
Let's say the actual factory overhead cost was 140% of direct labor cost. Then, if direct labor cost was DL, we would have:
Factory overhead applied = 150% * DL
Actual factory overhead = 140% * DL
Overapplied factory overhead = Factory overhead applied – Actual factory overhead
$10,000 = (150% * DL) – (140% * DL)
$10,000 = 10% * DL
DL = $100,000
Using the formula above, we can calculate the cost of goods manufactured as follows:
Direct labor = $100,000
Factory overhead applied = 150% * $100,000 = $150,000
Ending work in process inventory = 0 (not given)
Beginning work in process inventory = 0 (not given)
Cost of goods manufactured = Direct materials + Direct labor + Factory overhead applied – Ending work in process inventory – Beginning work in process inventory
Cost of goods manufactured = unknown + $100,000 + $150,000 – 0 – 0
Cost of goods manufactured = unknown + $250,000
Since the cost of goods manufactured plus the unknown direct materials cost must equal the cost of goods sold, we can deduce that the cost of goods sold is at least $250,000. Therefore, the only answer choice that makes sense is B) $170,000 (since it is the only answer choice greater than $130,000 and less than $250,000).

During Last Period, a Company's Overhead Rate Was 150% of Direct