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Predeterminded Overhead Rate:Disposition of Under- or Overapplied Overhead

Savallas Company is high automated and uses computers to control manufacturing operations. The company has a job-order costing system in use and applies manufacturing overhead cost to products on the basis of computer-hours of activity. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Computer-hours 85,000
Manufacturing overhead cost $1,530,000

During the year, a severe economic recession resulted in cutting back production and buildup of inventory in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year:

Computer-hours 60,000
Manufacturing overhead cost $1,350,000
Inventories at year-end:
Raw materials 400,000
Work in progress 160,000
Finished goods 1,040,000
Cost of goods sold 2,800,000

1. Compute the company's predetermined overhead rate for the year.

Predetermined Overhead Rate = Estimated total Manufacturing Overhead Cost
Estimated total amount o the Allocation Base = 1,530,000 / 85,000 = $18 per hour

2. Compute the under- or overapplied overhead for the year.

Actual manufacturing overhead cost: $1,530,000
Manufacturing overhead cost applied to
Work in Process during the year: 160,000
Unapplied (overapplied) overhead $1,370,000

3. Assume the company closes any under- or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate entry.

Cost of Goods Sold $2,800,000
Manufacturing Overhead 2,800,000

4. Assume that the company allocates any under- or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead applied during the year that remains in each account at the end of the year.

These amounts are $43,200 for Work in Process, $280,800 for Finished Goods, and $756,000.

Overhead applied to work in process inventory, December 31 $ 43,200 4.0%
Overhead applied in finished goods inventory, December 31 280,800 26.0%
Overhead applied in cost of goods sold, December 31 756,000 70.0 Total overhead applied $1,079,200 100.0%

5. How much higher or lower will net income be for the year if the under-or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold?


Solution Summary

Disposition of Under- or Overapplied Overhead is discussed.