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Treatment of Overhead

E2-5 Ramirez Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $275,000 for the year, and machine usage is estimated at 125,000 hours.

In January, $26,000 of overhead costs are incurred and 12,000 machine hours are
used. For the remainder of the year, $274,000 of overhead costs are incurred and
118,000 machine hours are worked.

Instructions

a. Compute the manufacturing overhead rate for the year.

b. What is the amount of under or overapplied overhead at January 31? How
should this amount be reported in the financial statements prepared on January 31?

c. What is the amount of under or overapplied overhead at December 31?

d. Assuming the under or overapplied overhead for the year is not allocated to
inventory accounts, prepare the adjusting entry to assign the amount to cost
of goods sold.

Solution Preview

Compute the manufacturing overhead rate for the year.

Overhead costs are expected to total $275,000 for the year, and machine usage is estimated at 125,000 hours.

Manufacturing overhead Rate= Standard Overhead Costs/Standard Machine hours
$2.20

What is the amount of under or overapplied ...

Solution Summary

This solution explains the treatment of overhead.

$2.19