In: Accounting
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Patel and Sons Inc. uses a standard cost system to apply factory overhead costs to units produced. Practical capacity for the plant is defined as 53,700 machine hours per year, which represents 26,850 units of output. Annual budgeted fixed factory overhead costs are $268,500 and the budgeted variable factory overhead cost rate is $3.20 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,700 units, which took 42,700 machine hours. Actual fixed factory overhead costs for the year amounted to $259,300 while the actual variable overhead cost per unit was $3.10.
Based on the information provided above, provide an appropriate end-of-year closing entry for each of the following two independent situations: (a) the net factory overhead cost variance is closed entirely to Cost of Goods Sold (CSG), and (b) the net factory overhead variance is allocated among WIP Inventory, Finished Goods Inventory, and CGS using the following percentages: 20%, 20%, and 60%, respectively. (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Predetermined overhead rate: | ||||||||
Budgeted fixed factory overhead costs | a | 268500 | ||||||
Practical capacity in machine hours | b | 53700 | ||||||
Fixed overhead cost per machine hour | c=a/b | 5 | ||||||
Variable factory overhead cost rate per unit | d | 3.2 | ||||||
Budgeted output | e | 26850 | ||||||
Variable factory overhead cost | f=d*e | 85920 | ||||||
Variable overhead cost per machine hour | g=f/b | 1.6 | ||||||
Predetermined overhead rate | c+g | 6.6 | ||||||
Factory overhead applied=standard machine hours allowed for units produced*predetermined overhead rate | ||||||||
Standard machine hours allowed for units produced=Actual units produced*Standard machine hours per unit | ||||||||
Standard machine hours per unit=Practical capacity in machine hours/Budgeted output=53700/26850=2 | ||||||||
Standard machine hours allowed for units produced=20700*2=41400 | ||||||||
Factory overhead applied=41400*6.6=$ 273240 | ||||||||
Actual factory overhead: | ||||||||
$ | ||||||||
Fixed | 259300 | |||||||
Variable | (20700*3.10) | 64170 | ||||||
Total | 323470 | |||||||
Factory overhead applied < Actual factory overhead,Hence, factory overhead is said to be under-applied. | ||||||||
Factory overhead cost variance=323470-273240=$ 50230 (Under applied) | ||||||||
Journal entry: | ||||||||
Ref. | General journal | Debit | Credit | |||||
a | Cost of goods sold | 50230 | ||||||
Factory overhead | 50230 | |||||||
(Net factory overhead cost variance is closed) | ||||||||
b. | WIP inventory | (50230*20%) | 10046 | |||||
Finished goods inventory | (50230*20%) | 10046 | ||||||
Cost of goods sold | (50230*60%) | 30138 | ||||||
Factory overhead | 50230 | |||||||
(Net factory overhead cost variance is closed) | ||||||||