Question

Jeremy owns a cafe and uses normal costing with a yearly material overhead budget of $92,000. Their sales are steady all year because of the local college during the school year and tourists during the summer. At year end, they have an applied material overhead of $90,000. After going over their end of year data, they found their actual material overhead was $83,000. Was their material overhead over or under applied, and by how much?

Answer 1

Jeremy's cafe had an overapplied overhead of $7,000, calculated by subtracting the actual material overhead ($83,000) from the applied material overhead ($90,000).

Step-by-step explanation:

Jeremy's cafe uses normal costing to apply material overhead to products throughout the year. The budgeted material overhead was $92,000 for the year, while the applied material overhead, which is based on estimated costs, was $90,000. After reviewing the actual figures, it was discovered that the actual material overhead amounted to $83,000.

Since the applied material overhead is the amount that was estimated and used during the year for costing purposes, and the actual material overhead is what was truly spent, we can determine if the overhead was over or under applied by comparing these two figures.

In Jeremy's case, the cafe applied more overhead ($90,000) than the actual material overhead costs ($83,000), resulting in an overapplied overhead of $7,000 (applied material overhead of $90,000 minus actual material overhead of $83,000).

To adjust for this overapplication, the overapplied amount will typically be credited, reducing cost of goods sold or another related account, depending on the company's accounting practices.