Scanlon Company Has a Job-Order Costing System and Applies Manufacturing $\begin{array} { l r } \text { Machine hours } & 95,000 \\\text { Manufacturing overhead cost } & \$ 1,710,000\end{array}$

question 79

Essay

Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine hours.The following estimates were used in preparing the predetermined overhead rate for the most recent year:
$\begin{array} { l r } \text { Machine hours } & 95,000 \\\text { Manufacturing overhead cost } & \$ 1,710,000\end{array}$
During the most recent year, a severe recession in the company's industry caused the curtailment of production and a buildup of inventory in the company's warehouses. The company's cost records revealed the following actual cost and operating data for the year:
$\begin{array} { l r } \text { Machine hours } & 75,000 \\\text { Manufacturing overhead cost } &\$ 1,687,500\end{array}$

$\text { Amount of applied overhead in inventories at year-end: }$
$\begin{array} { l r } \text { Work in process } & \$ 337,500\\\text { Finished goods} &253,125\end{array}$
$\text { Amount of applied overhead in }$
$\text { cost of goods sold for the year } 759.375$
Required:
(a.) Compute the company's predetermined overhead rate for the year and the amount of under- or overapplied overhead for the year.
(b.) Determine the difference between net income for the year if the under- or overapplied overhead is allocated to the appropriate accounts rather than closed out directly to Cost of Goods Sold.

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Definitions:

Equity Method

A method of accounting employed by a business to log its investment in another firm when it possesses considerable sway but lacks complete authority.

Noncontrolling Interest

A minority stake in a company that is not sufficient to confer control, often reflected in the equity section of the parent company's balance sheet.

Equipment

Tangible property owned by a company that is used in its operations, such as machinery, computers, and office furniture.

Initial Value Method

An accounting method that records investments at their original cost without adjustment for changes in fair value.