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 ....................... $2,30,000

 

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 under applied or over applied overhead for the year.

Answer 1

Required 1.

The predetermined overhead rate was calculated as follows:     

Predetermined rate = $230,000/4,000 machine hours

Predetermined rate = $57.50 per hr

 

 

Required 2.

Actual manufacturing overhead cost......................................................$228,000

Manufacturing overhead cost applied to

     Work in Process during the year:

     3,150 actual machine hours × $57.50 per hour..............................181,125

Underapplied overhead cost.......................................................................$ 46,875

Predetermined rate = $57.50 per hr

Underapplied overhead cost = $ 46,875