Question

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 $5.7 million, and the practical level of activity is 375,000 machine hours.    During the year, Craig used 382,500 machine hours and incurred actual overhead costs of $5.73 million. Craig also had the following balances of applied overhead in its accounts:

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.

4. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year. If an amount box does not require an entry, leave it blank.

Answer 1

Predetermined overhead rate should be computed by dividing the expected overhead cost by the practical level of activity $5,700,000 375,000 Predetermined overhead rate - S15.20 per machine hour 2. Overhead is applied to production by multiplying the predetermined overhead rate by the actual number of machine hours used. Therefore, Overhead applied- $15.20 x 382,500 - $5,814,000 Actual overhead incurred $5,730,000 Therefore Overhead variance- $5,814.000 - $5,730,000 - $84,000 Manufacturing overhead applied is greater than the actual overhead incurred. Therefore, if the overhead variance is immaterial, it should be closed by including it in the cost of goods sold The following journal entry should be prepared to dispose of the variance at the end of the ear. Account Titles and Explanation Manufacturing Overhead Debit (S) Credit (S 84.000 Cost of Goods Sold 84.000

If the overhead variance is material, it should be appropriated between the cost of goods sold, finished goods inventory, and work-in-process inventory Compute the amount of overhead variance allocated to each category as follows 84,000 84,000 84,000 2 Work-in process inv Finished Cost of goods sold Total 576,000 624,000 1.800,000 3,000,000 16,128 17,472 50,400 84,000 nven 4 5 Above figures have been computed in the following manner Allocated 2 Work-in 3 Finished 4 Cost of goods sold 5 Total Amoun Variance 576000 624000 1800000 -SUM(B2:B4) Overhead Overhead 84000 84000 Variance 84000 (B2/B5) 84000 (B3/B5) -84000 (B4/B5 SUM D2:D4) i process invent inven The following journal entry should be prepared to dispose of the variance at the end of the ear. Account Titles and Explanation Debit (S)Credit (S) Manufacturing Overhead 84.000 Work-in-process Invent Finished Goods Inv Cost of Goods Sold Invento 16.128 17,472 50.400