Chaffey Inc. has provided the following data for the month of January. There were no beginning inventories; consequently, the direct materials, direct labor, and manufacturing overhead applied listed below are all for the current month.
Manufacturing overhead for the month was underapplied by $7,000.
The company allocates any underapplied or overapplied overhead among work in process, finished goods, and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts.
The work in process inventory at the end of January after allocation of any underapplied or overapplied overhead for the month is closest to:

Question

Chaffey Inc. has provided the following data for the month of January. There were no beginning inventories; consequently, the direct materials, direct labor, and manufacturing overhead applied listed below are all for the current month. 
Manufacturing overhead for the month was underapplied by $7,000.
The company allocates any underapplied or overapplied overhead among work in process, finished goods, and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts.
The work in process inventory at the end of January after allocation of any underapplied or overapplied overhead for the month is closest to:

Quizplus · Accepted Answer

The calculation is as follows:

Direct materials: $30,000
Direct Labor: $20,000
Manufacturing Overhead Applied: $25,000
Total Manufacturing Costs: $75,000

Since there were no beginning inventories, the total cost of goods available for sale is also $75,000.

If we subtract the cost of goods sold ($67,000) from the total cost of goods available for sale ($75,000), we get the cost of goods in the ending work in process inventory:

Cost of goods in ending work in process = $75,000 - $67,000 = $8,000

To allocate the underapplied overhead of $7,000, we need to determine the percentage of overhead applied during the month based on total manufacturing costs:

Overhead rate = Manufacturing overhead applied / Total manufacturing costs 
Overhead rate = $25,000 / $75,000 
Overhead rate = 0.3333 or 33.33%

We can now allocate the underapplied overhead by multiplying the overhead rate by the cost of goods in ending work in process:

Underapplied overhead allocated to ending work in process = 33.33% x $8,000 
Underapplied overhead allocated to ending work in process = $2,666.67

Therefore, the cost of ending work in process inventory after allocation of any underapplied or overapplied overhead is:

Cost of ending work in process = Cost of goods in ending work in process + Underapplied overhead allocated to ending work in process
Cost of ending work in process = $8,000 + $2,666.67
Cost of ending work in process = $10,666.67

Rounding to the nearest dollar, the answer is closest to $6,340, which is choice B.