Question

Predetermined Overhead Rate, Overhead Variances, Journal Entries Craig Company uses a predetermined overhead rate to assign overhead to jobs. Because Craig's production is machine intensive, overhead is applied on the basis of machine hours. The expected overhead for the year was $4,910,400, and the practical level of activity is 372,000 machine hours. During the year, Craig used 379,000 machine hours and incurred actual overhead costs of $4,922,800. Craig also had the following balances of applied overhead in its accounts:

Work-in-process inventory $620,800
Finished goods inventory 627,200
Cost of goods sold 1,952,000

Required:

a. Compute a predetermined overhead rate for Craig. Round your answer to the nearest cent.
b. Compute the overhead variance, and label it as under- or overapplied.
c. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year.
d. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year.

Answer 1

The predetermined overhead rate for Craig Company is $13.20 per machine hour. The overhead variance is overapplied by $80,000. If immaterial, it is closed out to Cost of Goods Sold, and if material, it is prorated among Work-in-process inventory, Finished goods inventory, and Cost of Goods Sold.

Step-by-step explanation:

To compute the predetermined overhead rate for Craig Company:

1. Divide the expected overhead for the year by the practical level of activity in machine hours: Predetermined overhead rate = $4,910,400 / 372,000 machine hours = $13.20 per machine hour.

For the overhead variance:

1. Multiply the predetermined overhead rate by the actual machine hours used: Applied overhead = $13.20 per machine hour * 379,000 machine hours = $5,002,800.
2. Subtract the applied overhead from the actual overhead costs: Overhead variance = $4,922,800 (actual) - $5,002,800 (applied) = -$80,000, which indicates overapplied overhead.

To prepare the journal entry for an immaterial overhead variance:

• Debit: Manufacturing Overhead $80,000
• Credit: Cost of Goods Sold $80,000

For a material overhead variance, the journal entry involves prorating the variance among the balances of applied overhead:

• Debit: Manufacturing Overhead $80,000
• Credit: Work-in-process inventory, Finished goods inventory, and Cost of goods sold based on their respective proportions of the total applied overhead ($620,800 + $627,200 + $1,952,000).