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.

Solutions

Expert Solution

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.

ekkarill92 answered 2 years ago

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