Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of the direct materials uses in production (not on the basis of raw materials). Its predetermined overhead rate was based on a cost formula that estimated $126,000 of manufacturing overhead for an estimated allocation base of $90,000 direct material dollars to be used in production. The Company has provided the following data for the just completed year: Purchase of raw materials $138,000
Direct Labor Cost $86,000

Manufacturing Overhead Costs:

Indirect Labor $122,600
Property Taxes $8,900
depreciation of equipment $15,000
Maintenance $15,000
Insurance $10,000
Rent, building $35,000

Beginning Ending
Raw Materials $25,000 $15,000
Work in Process $49,000 $39,000
Finished Goods $74,000 $59,000

Required:
a. Compute the predetermined overhead rate for the year.
b. Compute the amount of underapplied or overapplied overhead for the year.
c. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.

Answer and Explanation:

1. The computation of the predetermined overhead rate is shown below;

Predetermined Overhead Rate is

= Estimated Manufacturing Overhead ÷ Estimated Allocation Base × 100

= $126,000 ÷ $90,000

= 140%

2. Now the  amount of underapplied or overapplied overhead is

But before that we need to find out the overhead applied and overhead incurred  which is

= (Opening Value of Direct Material + Purchase of Direct Material - Closing Value of Direct Material) × Predetermined Overhead Rate

= ($25,000 + 138,000 - $15,000) × 140%

= $207,200

Now the Overhead Incurred is

Indirect Labor $122,600

Property Taxes $8,900

depreciation of equipment $15,000

Maintenance $15,000

Insurance $10,000

Rent, building $35,000

Total            $206,500

So, the overhead over applied is

= $207,200 - $206,500

= $700

c. Now the schedule of cost of goods manufactured is presented below:

Opening Raw Material  $25,000

Add Purchases of Raw Material $138,000

Less Closing Stock of Raw Material -$15,000  

Direct Material Used               $148,000

Add:

Direct Labor                            $86,000

Manufacturing Overhead Applied $207,200

Total Manufacturing Costs  $441,200

Add Opening WIP                         $49,000  

Less Closing WIP                        -$39,000

Cost of Goods Manufactured$451,200

of the three mortgage options that demarco and tanya have to choose from, the balloon payment mortgage would be their best option, over adjustable payment and fixed payment plans.ultimately, the balloon payment plan would save demarco and tanya overall, in interest, would cost less monthly, and they would only have to make these payments for 8 years, opposing to 30 years for adjustable or fixed payment plans. 

overall, demarco and tanya would save $80,811 if they chose balloon payments over fixed payments, and would save $116,711 if they choose balloon payments over adjustable payments. benefits with choosing fixed payments over adjustable payments is that, in the end, the payments will still be $836.30 a month, while with adjustable payments, the initial monthly payments will be $763.38 to $1082.70 a month, ultimately leading to a more costly purchase. benefits with choosing fixed payments over balloon payments are not present. benefits in choosing adjustable payments over is that it has a lower interest rate, and starts with lower monthly payments initially. benefits in choosing adjustable payments over balloon payments include a lower interest rate, and lower initial monthly payments. benefits in choosing balloon payments over fixed payments include lower interest rates, lower overall price, lower monthly payments, takes less time to pay off, and does not require a downpayment. benefits in choosing balloon payments over adjustable payments include, lower monthly payments (when averaged), takes less time to pay off, and lower overall price.

hence, option c, balloon payments, is the best option for demarco and tanya to make this purchase, for it will save them a minimum of $80811, and a maximum of $116,711.