Explore BrainMass

Explore BrainMass

    Predeterminded Overhead Rate:Disposition of Under- or Overapplied Overhead

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 6:33 pm ad1c9bdddf


    Solution Summary

    Disposition of Under- or Overapplied Overhead is discussed.