In: Accounting
At the end of 2019, ABC Company’s manufacturing inventory and expense accounts held the following costs.
Work in Process Inventory | Finished Goods Inventory | Cost of Goods Sold | |
Direct Materials | P120,000 | P190,000 | P350,000 |
Direct Labor | P100,000 | P250,000 | P580,000 |
Factory Overhead | P60,000 | P300,000 | P480,000 |
Alonzo’s accountant applied overhead during the year using a budgeted rate of P8.40 per hour. At year end, they computed the actual rate of P10.00 per machine hour. The beginning balances of both work in process inventory and finished goods inventory were zero.
How many machine hours worked during 2019?
Was a factory overhead over or under applied for year? By how much?
Prorate the over or under applied overhead to the appropriate accounts.
Show solution for each number.
Total Factory Overhead Cost Applied by the accountant = P60,000 + P300,000 + P480,000 = P840,000
Budgeted Overhead rate per hour = P8.40
Thus, total number of actual hours worked during 2019 = Total Cost applied / Budgeted Overhead rate
= P840,000 / P8.40
= 100,000 hours
Actual factory overhead cost incurred = Actual hours worked * Actual Overhead rate
= 100,000 hours * P10
= P1,000,000
Since, Actual cost is greater than the applied cost, the applied cost is under applied.
Amount by which the factory cost is under applied = Actual Cost incurred - Cost applied
= P1,000,000 - P840,000
= P160,000
The total amount of under applied overhead cost shall be debited to Cost of Goods sold irrespective of whether it relates to work in progress, finished goods inventory or inventory sold.