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choosing a driver for overhead allocation.

Jim’s Furniture Inc. manufactures furniture in NY. Jim’s uses job-order costing system and uses machine hours to allocate overhead costs. Estimated overhead for the year was $800,000 and estimated machine hours were 50,000 hours. Total machine hours used to the end of November were 45,000 hours. Total actual overhead to the end of November was $680,000. Raw materials inventory at the end of November was $400,000. Jim’s uses a first in first out basis for inventory and calculating COGS. Direct labor is paid $20 per hour in 2017. A summary of Jim’s finished goods inventory for the end of November (beginning of December) is shown below:

DescriptionQuantityUnit CostTotal Cost
Chairs2,100$18$37,800
Large tables1,3405675,040
Small tables1,8504583,250
Lounge chairs1,5903250,880
Umbrellas8602824,080

On Nov. 30th, 2017 Jim’s had the following jobs in work in process inventory:

Job #DescriptionQuantityAccumulated cost
01Large tables3,000$90,000
02Lounge chairs4,00042,000
03Umbrellas1,50018,000

Mike’s also had the following production information for the month of December 2017:

Job #DescriptionQuantity startedMachine hoursDirect labor hoursRaw material usedQuantity completed
01Large tables3,000800 hrs200 hrs$150,0003,000
02Lounge chairs4,000820 hrs780 hrs60,0004,000
03Umbrellas1,500300 hrs300 hrs37,5000
04Small tables7,0002,350 hrs2,400 hrs230,0007,000
05Chairs7,500700 hrs400 hrs120,0000
Total4,970 hrs597,500

Note: All raw materials can be directly traced to a furniture.

Jim’s sold 1,300 chairs, 3,500 large tables, and 4,600 lounge chairs in December 2017.

In December 2017, total materials purchased were $200,000, supervisors’ salary was $18,000, and machine depreciation was $44,000. There was no other manufacturing overhead occurred in this month.

Required:

1. Determine the ending balance of the following accounts at the end of December to help Jim’s prepare for the 2017 annual financial statements. (Hint: calculate the predetermined overhead rate to allocate overhead.) Please round to nearest dollar.

2. Calculate the amount of under- or over – applied overhead for 2017.

3. Discuss whether Jim’s should use direct labor hours instead of machine hours to apply their overhead, considering the “criteria” for choosing a driver for overhead allocation.

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