Calculating Overhead and Conversion Costs

Case Study #1

Receiving Factory
Raw Materials Work in Process
Beginning Inv 41,000 Given Beginning Inv 56,000 Given
Purchases 325,000 Given Trf from Raw Mat. 325,000
Available 366,000 Sum Direct Labor 220,000 Given
Ending Inv 41,000 Overhead 408,571
Transfer to WIP 325,000 Difference Available 1,009,571 Sum
End Inv 24,571
Cost of Goods MFG 985,000 Difference

Direct Materials Conversion Costs
Prime Costs 545,000 Given Direct Labor 220,000 Given
Direct Labor 220,000 Given Overheead 408,571 computed
Direct Materials 325,000 Computed Conversion Costs 628,571 computed

Compute Overhead
Direct Labor 220,000 35%
Overhead 408,571 65%
628,571 Sum




Key Computations:
1 Gross Profit = 30% of Sales, so Cost of Goods Sold - 70% of Sales.
2 Overhead was 65% of Conversion Costs. Conversion Costs are Direct Labor + Overhead. If Overhead is 65%, the
When you know the Conversion Costs, you can compute Overhead.