Question

Gordon Company is highly automated and uses computerized controllers in manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of the time recorded to complete each job by the computerized controllers attached to each machine. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Machine time in hours		4,000
Manufacturing overhead cost	$	230,000

A severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine time in hours		3,150
Manufacturing overhead cost	$	228,000
Inventories at year-end:
Raw materials	$	20,000
Work in process	$	32,000
Finished goods	$	530,000
Cost of goods sold	$	428,000

Required:

1. Compute the company’s predetermined overhead rate for the year.

2. Compute the underapplied or overapplied overhead for the year.

3. Prepare the journal entry to show the disposal of under/overapplied overhead. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Ans. 1	*Predetermined overhead rate   =   Estimated manufacturing overhead cost / Estimated machine time in hours
	$230,000 / 4,000
	$57.5 per machine hour
Ans. 2	*First we need to calculate the applied overhead cost.
	Overhead applied = Actual machine hours * Predetermined overhead rate
	3,150 * $57.5
	$181,125
	*Calculation of Over / Under applied overhead is as follows :
	Under applied overhead = Actual overhead - Applied overhead
	$228,000 - $181,125
	$46,875
	If the applied overhead is less than the Actual overhead
	it means that the overhead is under applied.
Ans. 3	Journal entry to record the under applied overhead:
	Accounts	Debit	Credit
	Cost of goods sold	$46,875
	Manufacturing overhead		$46,875
	(To record under applied overhead)