Question

Zoey owns a bakery and uses normal costing with a material overhead budget of $40,000. Their sales are steady all year due to custom cakes and cupcakes for different types of parties. At year end, they have an applied material overhead of $32,000. After going over their end of year data, they found that their actual material overhead was $35,000. Was their material overhead over or under applied, and by how much?

Answer 1

Zoey's bakery had under-applied material overhead as they applied $32,000 but incurred $35,000, resulting in a $3,000 under-applied amount. Spreading the overhead means allocating fixed costs over more units, which reduces the average fixed cost per unit as output increases.

Step-by-step explanation:

Zoey's bakery, which uses normal costing, had budgeted for material overhead costs of $40,000. However, at the end of the year, applied material overhead was recorded as $32,000, while the actual material overhead costs incurred amounted to $35,000. This scenario shows that the material overhead was under-applied because the applied overhead was less than the actual overhead by $3,000. This discrepancy requires an adjustment in the accounting books to reflect the true cost incurred.

Spreading the overhead refers to allocating the fixed costs over the produced goods. For example, if the fixed cost is $1,000 and the output increases, the average fixed cost per unit decreases. This concept is illustrated in the average fixed cost curve, which shows a downward slope as production quantity increases, representing the decreasing average cost per unit due to spreading the overhead across more units.