Question

Exercise 3-9 Applying Overhead; T-accounts; Journal Entries [LO3-1, LO3-2, LO3-4] Harwood Company uses a job-order costing system that applies overhead cost to jobs on the basis of machine-hours. The company's predetermined overhead rate of $2.40 per machine-hour was based on a cost formula that estimates $192,000 of total manufacturing overhead for an estimated activity level of 80,000 machine-hours. Required: 1. Assume that during the year the company works only 75,000 machine-hours and incurs the following costs in the Manufacturing Overhead and Work in Process accounts: Compute the amount of overhead cost that would be applied to Work in Process for the year and make the entry in your T-accounts. 2A. Compute the amount of underapplied or overapplied overhead for the year and show the balance in your Manufacturing Overhead T-account. 2B. Prepare a journal entry to close the company's underapplied or overapplied overhead to Cost of Goods Sold.

Answer 1

The Harwood Company applied $180,000 in overhead based on their predetermined rate and actual machine-hours used. The company had $12,000 of underapplied overhead, which was then closed to the Cost of Goods Sold with a journal entry debiting Manufacturing Overhead and crediting COGS by the underapplied amount.

Step-by-step explanation:

The Harwood Company uses a job-order costing system and bases its overhead cost application on machine-hours. With a predetermined overhead rate of $2.40 per machine-hour, and an estimated total manufacturing overhead cost of $192,000 for 80,000 machine-hours, the company needs to calculate the applied overhead and the underapplied or overapplied amount for the year when actual activity was 75,000 machine-hours.

Step 1: Calculating Applied Overhead

To calculate the applied overhead for the year:

• Applied Overhead = Predetermined Overhead Rate x Actual Machine-Hours Used
• Applied Overhead = $2.40 per machine-hour x 75,000 machine-hours
• Applied Overhead = $180,000

Step 2: Calculating Overapplied or Underapplied Overhead

The total estimated overhead was based on 80,000 machine-hours. Since only 75,000 machine-hours were used, we compare the applied overhead with the actual overhead costs incurred.

• Overapplied or Underapplied Overhead = Total Estimated Overhead - Applied Overhead
• Overapplied or Underapplied Overhead = $192,000 - $180,000
• Overapplied or Underapplied Overhead = $12,000 underapplied

Step 3: Journal Entry to Close Overapplied or Underapplied Overhead

The journal entry to close the underapplied overhead to the Cost of Goods Sold (COGS) is:

• Debit Manufacturing Overhead $12,000
• Credit COGS $12,000

Thus, the overhead is underapplied by $12,000 and this amount is added to COGS to adjust for the actual costs incurred.