Question

The Sage Company uses a budgeted factory overhead rate to apply manufacturing overhead to production. The rate is based on direct labour hours. Estimates for the year 2012 are given below:

Estimated manufacturing overhead		$540,100
Estimated direct labour hours		49,100

During 2012 the Paine Company used 56,250 direct labour hours. At the end of 2012, the company's records revealed the following information:

Raw materials inventory		$37,860
Work-in-process inventory		102,560
Finished goods inventory		187,070
Cost of goods sold		667,090
Manufacturing overhead		534,590

Calculate the budgeted overhead rate for 2012.

Budgeted overhead rate

$

per DLH

Determine the amount of underapplied or overapplied overhead for 2012.

Underapplied / Overapplied overhead is $

If underapplied or overapplied overhead is treated as an adjustment to cost of goods sold, determine the cost of goods sold that would appear on the company's income statement.

Cost of goods sold

$

Answer 1

Budgeted overhead rate = $540,100 / 49,100 = $11 per DLH

Applied overhead = $11 X 56,250 = $618,750

Actual overhead = $534,590

When applied overhead is more than actual overhead, the overhead is overapplied.

= $618,750 - $534,590

= $84,160 Overapplied

Overapplied overheads will reduce the cost of goods sold.

Cost of goods sold = $667,090 - $84,160 = $582,930