Question

4. Baldini Manufacturing is a family-owned furniture company in Italy. The company uses a job-order costing system and applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 75,000 machine-hours and incur $900,000 in manufacturing overhead cost. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours 70,000

Manufacturing overhead cost $820,000

Inventories at year-end:

Raw materials $40,000

Work in process $120,000

Finished goods $500,000

Cost of goods sold $1,200,000

a. Compute the underapplied or overapplied overhead.

b. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

Answer 1

1) First We have to calculate budgeted overhead rate

The formula for calculating OVerhead rate is Total Budgeted Overheads/ Total Budgeted Machine Hours

So the overhead rate will be $900000/ 75000 hours = $12 /hour

Actual Overheads is given as $820000

Now Actual Machine Hours is 70000 hours

So Budgeted Overhead Cost for 70000 machine hours is 70000 hours * 12/hour = $840000

As Budgeted Overheads are more than Actual overhead We can conclude that overheads are over applied. This can be viewed as favorable outcome, because less has been spent than anticipated for the level of achieved production.

So the over applied overhead is $840000-$820000 = $20000

2) Journal entry for closing Over Applied Overhead to Cost of Goods Sold will be :

Manufacturing Overhead Cost A/c Dr     $20000

        To Cost of Goods Sold   A/c                              $20000