Question

At the beginning of the year, B Company estimated Overhead for the year to be $562,400. It estimated Direct Labor Hours for the year to be 95,000. B Company applies overhead based on direct labor hours. During the month of January only, actual direct labor hours were 7,750. By the end of the year, total actual Overhead was $554,130 and actual Direct Labor Hours were 94,000. Assume that before any adjustment for under-applied or over-applied overhead, that Cost of Goods Sold was $702,000.

QUESTION #1: Calculate the predetermined overhead rate for B Company.

QUESTION #2: Calculate the amount of overhead that would have been applied into Work-in-Process Inventory in January.

QUESTION #3: Calculate the total applied overhead for the year AND tell if it was under-applied or over-applied AND by how much.

QUESTION #4: Calculate how much Cost of Goods Sold would be after adjusting for any under-applied or over-applied overhead.

Answer 1

1

Pre determined overhead recovery rate

=

Estimated manufacturing overhead cost/ Estimated allocation base (Direct labour hours)

=

562400/95000

=

5.92

5.90

2

Overhead applied into Work in process inventory in January

=

Actual Direct labour hours * Predetermined overhead recovery rate

=

7750*5.92

=

45880

3

Total applied Overhead during the year

=

Actual Direct labour hours* Predetermined overhead recovery rate

=

94000*5.92

=

5,56,480

2,350

Actual overhead cost

=

554130

Conclusion :

Actual overhead cost is less than applied overhaed based on recovery rate, hence overhead is over-applied by 2350 $ (556480-554130)

4

COGS after adjustment of over applied overhead

COGS

702000

Less: Over applied overhead

-2350

Adjusted COGS

699650