Question

Predetermined Overhead Rate, Overhead Variances, Journal Entries

Craig Company uses a predetermined overhead rate to assign overhead to jobs. Because Craig's production is machine intensive, overhead is applied on the basis of machine hours. The expected overhead for the year was $6,461,400, and the practical level of activity is 363,000 machine hours.

   During the year, Craig used 369,500 machine hours and incurred actual overhead costs of $6,502,100. Craig also had the following balances of applied overhead in its accounts:

Work-in-process inventory	$	551,850
Finished goods inventory		571,660
Cost of goods sold		1,706,490

4. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year. If an amount box does not require an entry, leave it blank.

	Cost of goods sold
	Work-in-process inventory
	Finished goods inventory
			???????????????

Answer 1

To be able to pass the journal entry, we need to first calculate whether there is an under or over application of overheads. This can be done by the user of a predetermined overhead rate.

Predetermined overhead rate(POHR)= estimated overhead/estimated machine hours= 6461400/363000= $17.8 per machine hour

Overhead applied= POHR* actual machine hours= 17.8* 369500= $6577100

The difference between the overhead applied and the actual overhead gives the under/over applied overheads.

Actual overhead= $6502100

Under/over application(variance)= 6577100-6502100= $75000(over applied)

Now we need to allocate this over application, to the cost of goods sold, WIP and finished goods in the proportion of their respective account balances. The journal entry will be as follows:

	Debit $	Credit $
Manufacturing overhead	75000
Cost of goods sold		45225
Finished goods inventory		15150
Work in process inventory		14625
(Journal entry for disposal of overhead variance. Over applied overhead credited to respective accounts to reflect actual cost. Refer the table below for allocation details.)

Allocation of over applied overheads

Proportion Over application allocated($) Cost of goods sold [(1706490)/(551850+571660+1706490)]=0.603 45225 (75000*0.603) Finished goods [(571660)/(2830000)]= 0.202 15150 (75000*0.202) WIP [(551850)/(2830000)]= 0.195 14625 (75000*0.195) Total 75000