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 $5,043,200, and the practical level of activity is 394,000 machine hours. During the year, Craig used 402,000 machine hours and incurred actual overhead costs of $5,066,600. Craig also had the following balances of applied overhead in its accounts: Work-in-process inventory $ 529,920 Finished goods inventory 601,920 Cost of goods sold 1,748,160 Required: 1. Compute a predetermined overhead rate for Craig. Round your answer to the nearest cent. per machine hour 2. Compute the overhead variance, and label it as under or overapplied 3. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year,

Answer 1

Part 1) Calculation of Pre determined overhead rate

Pre determined overhead Rate

=Expected Overheads/ Practical level of Machine hours

=5043200/394000=$12.8 per machine hour

Part 2)Calculation of Overhead Variance

Applied overhead =Actual machine hours * Predetermined o/h rate

Applied overhead =402000*12.8 =$5145600

Overhead variance =Applied overhead- Actual overhead

Overhead variance =5145600 - 5066600

Overhead variance =79000 over applied

Part 3)Journal Entry

Particulars	Debit	Credt
Manufacturing overheads To Cost of Goods sold ( For disposing off variance)	79000	79000