Question

Pharoah Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are estimate $322,000 for the year, and machine usage is estimated at 140,000 hours. For the year, $360,640 of overhead costs are incurred, and 145,600 hours are used. Prepare the adjusting entry to assign the under-or overapplied overhead for the year to cost of goods sold.

Answer 1

To prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold, calculate the predetermined overhead rate, subtract the actual overhead costs incurred from the applied overhead costs, and create an adjusting entry with a debit to Cost of Goods Sold and a credit to Manufacturing Overhead.

Step-by-step explanation:

To prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold, we first need to calculate the predetermined overhead rate. The predetermined overhead rate is calculated by dividing the estimated overhead costs by the estimated machine hours. In this case, the estimated overhead costs are $322,000 and the estimated machine hours are 140,000. Therefore, the predetermined overhead rate is $2.30 per machine hour.

To calculate the under- or overapplied overhead, we subtract the actual overhead costs incurred from the applied overhead costs based on the predetermined overhead rate. In this case, the actual overhead costs incurred are $360,640 and the machine hours used are 145,600. Using the predetermined overhead rate of $2.30 per machine hour, the applied overhead costs would be $335,680 (145,600 machine hours x $2.30 per machine hour).

Therefore, the underapplied overhead can be calculated as follows: Applied overhead costs ($335,680) minus actual overhead costs ($360,640) equals underapplied overhead of $24,960. The adjusting entry to assign the underapplied overhead to cost of goods sold would be a debit to Cost of Goods Sold for $24,960 and a credit to Manufacturing Overhead for $24,960.