Question

PB11.

LO 4.6When setting its predetermined overhead application rate, Tasty Turtle estimated its overhead would be $75,000 and manufacturing would require 25,000 machine hours in the next year. At the end of the year, it found that actual overhead was $74,000 and manufacturing required 24,000 machine hours.

Determine the predetermined overhead rate.
What is the overhead applied during the year?
Prepare the journal entry to eliminate the under- or overapplied overhead.

Answer 1

1) Overhead Rate: 75,000 / 25,000 = $3 per hour

2) Overhead Applied: 74,000 * 3 = $72,000

3) Work in progress / Inventory (Debit) 2,000

Manufacturing overheads (Credit) 2,000

Step-by-step explanation:

1) Overhead rate: Estimated overhead / Estimated Machine Hours

Overhead rate: $75,000 / 25,000

Overhead rate: $3 per hour

2) Total 24,000 machines hours worked during the period

Overhead applied: Total hours worked * rate per hour (calculated above)

Overhead applied: 24,000 * 3

Overhead applied: $72,000

3) Actual overhead expenses amounted to $74,000, however actual overhead applied are $72,000 (calculated above), thus there is under-application of $2,000. Following journal entry is made to record this application and charge the same either to finished goods / work in progress or cost of goods sold, depending whether the goods are still in work in process, finished goods or the goods have been sold.

Work in progress / Inventory (Debit) 2,000

Manufacturing overheads (Credit) 2,000