Question

(1) Calculate the amount of overhead allocated to the products of a company that has a predetermined overhead rate of $10 per machine hour if machines were used for 10,000 hours.

(2) What if the company actually spent $95,000 on overhead costs? What causes a company to have overapplied or underapplied overhead? Is this a situation that would eventually need to be resolved? If so, how?

Answer 1

Solution:

Generally the the actual overhead costs are recorded in the manufacturing overhead account, The work in process account is charged with the a predetermined overhead rate multiplied by the actual cost driver, here it is the machine hours.

Basically the work in process account deals with the applied overhead rather than the actual overhead, the reason being to avoid fluctuations is production costs, This will usually lead to a underapplied or overapplied overhead costs.

However this underapplied or overapplied will be closed either to cost of goods sold account( when the difference is negligible) or to the WIP, Finished goods and cost of goods sold (COGS) propotionately (when the difference is considerable)

a)

Overhead allocated = $10 * 10000 machine hours =$100,000

b)

When the actual overhead is $95000, there is a overapplied overhead (the applied OH is more than the actual).

Here overapplied OH is $95000 - $100,000 = $5000

This can be eiither closed to the COGS account or apportionate them between WIP, Finished goods and cost of goods sold (COGS).

Hope this helps! In case of any clarifications, kindly use the comment box below