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Consider the following selected data for the Spanish Town Manufacturing 4. Company for 2009. Budgeted manufacturing...

Consider the following selected data for the Spanish Town Manufacturing 4. Company for 2009.

Budgeted manufacturing overhead $7,000,000
Budgeted machine-hours 200,000
Actual manufacturing overhead $6,800,000
Actual machine-hours 195,000

The company uses normal costing. Its job costing system has a single manufacturing overhead cost pool. Costs are allocated to jobs using a budgeted machine-hour rate. Any amount of under- or over-allocation is written off to Cost of Goods Sold.

a) Compute the budgeted manufacturing overhead rate.

b) Calculate the manufacturing overhead allocated during 2009

c) Compute the amount of under or over the allocation of manufacturing overhead. Do you believe the amount is material? Prepare a journal entry to dispose of this amount.

Solutions

Expert Solution

Solution

Spanish Town Manufacturing

  1. Computation of budgeted manufacturing overhead rate:

Budgeted manufacturing overhead rate = budgeted manufacturing overhead/budgeted machine hours

Budgeted manufacturing overhead = $7,000,000

Budgeted machine hours = 200,000

Budgeted manufacturing overhead rate = $7,000,000/200,000 = $35

  1. Computation of the manufacturing overhead allocation during 2009:

Manufacturing overhead allocation = Budgeted manufacturing overhead rate x actual machine hours

Budgeted manufacturing overhead rate = $35

Actual machine hours = 195,000

Manufacturing overhead allocation = $35 x 195,000 = $6,825,000

  1. Computation of the amount of the under or over the allocation of manufacturing overhead:

Manufacturing overhead allocated = $6,825,000

Actual manufacturing overhead = $6,800,000

Overallocated manufacturing overhead = $25,000

The company’s allocated overhead (6,825,000) is greater than actual overhead (6,800,000). Hence, the company over allocated overhead to the extent of $25,000.

The over or under applied overhead is a normal occurrence in manufacturing companies as the overhead is applied based on a predetermined overhead rate. This rate is computed based on estimated data at the beginning of the period. The amount of over allocated overhead is not material.

Journal entry to dispose over allocated overhead,

Account Titles and Explanation

Debit

Credit

Manufacturing Overhead

$25,000

Cost of Goods Sold

$25,000

This entry would decrease the cost of goods sold over stated by $25,000.

ekkarill92 answered 2 years ago
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