Question

Ikerd Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $322,000 of overhead costs are incurred and 130,000 hours are used.

Manufacturing overhead rate

$

per machine hour

Manufacturing Overhead

$

repare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

Answer 1

Concepts and reason

Job order Costing: It is a method of cost accounting, in which cost is collected and accumulated for each job, work order, or project separately. Especially the job order costing is followed in organizations where customized goods are produced.

Manufacturing overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs.

Direct labor cost: It refers to the cost of providing wages to the workers who are directly associated with the production of goods or services rendered to the customers. The cost of direct labour includes the wages, payroll taxes, and all the benefits sponsored by the manufacturer.

Direct materials: Direct materials are the raw materials which are directly related with the production of the goods.

Completion of Job: After a job is completed, the cost of the job is transferred to finished goods inventory from work-in-process inventory.

Actual overhead cost: These are the indirect manufacturing costs that are actually incurred while producing goods. It is calculated by multiplying the actual labour hours or machine hours used with the number of units produced.

Applied Overhead cost: These are the indirect manufacturing costs that are allocated to the goods produced. It is calculated by multiplying the manufacturing overhead rate with the actual activity used for production.

Over or under applied overhead:

When the applied overhead cost is more than the actual overhead cost for a particular period, then the overhead is over applied.

When the applied overhead cost is less than the actual overhead cost, then the overhead cost is under applied.

Transaction: A transaction in business refers to any events that affect the financial position of the business that can be reliably measured in monetary terms. A business transaction affects the accounting equation.

Journal entry: The record of business transactions in a chronological order with equal amounts of debits and credits in the journal is referred to as journal entry.

General Journal: It is a book in which the financial transactions that takes place in the company’s day-day business activities are recorded in a chronological order.

Adjusting entries: These are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts in conformity with the accrual principle of accounting.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recoded in the said account. In other words the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.

2.Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decrease in all asset accounts are credited.

Normal balance of an account: Normal balance of an account refers to that side of the account where the increase in the account is recorded. Normal balance means, the usual or natural balance of a particular account. All assets accounts have normal debit balances and all liabilities accounts have normal credit balances. Revenue/Income account normally have credit balances, expense account normally have debit balances.

Fundamentals

Beginning work-in process: It refers to the units that are yet to be converted into finished goods. It belongs to the previous period’s closing balance that is shown as beginning balance for the current period.

Ending work-in process: It refers to units that could not converted into the finished goods in the current period.

Manufacturing overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. It is also known as predetermined overhead rate.

The formula to calculate the manufacturing overhead rate is shown below:

The formula for manufacturing overhead cost applied is shown below:

The formula for under applied or over applied overhead cost is shown below:

Accounting Equation: This is a mathematical equation which represents the association between assets, liabilities and stockholders’ equity. This is also called as balance sheet equation. It is represented as follows:

Asset: The source which is possessed or controlled to generate income in the future is known as an asset.

Liability: Liability is an agreement made by the company to pay a certain amount for the goods or services received by the company in the past.

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known also as net assets of the company, which is assets minus liabilities.

Revenue: Revenue is the total income earned by an organization by selling goods or rendering services.

Expense: Expense is the cost borne by a company to produce and sell the goods and services to the customers.

Calculate the amount of under applied or over applied overhead cost:

Working Note:

(1)

Calculate the manufacturing overhead rate.

(2)

Calculate the manufacturing overhead cost applied:

Accounting equation: The following is the accounting equation for the adjustment entry of cost of goods sold:

Record the adjusting entry for assigning the under-applied manufacturing overhead cost to cost of goods sold.

Ans:

Amount of under applied overhead cost for the year is $10,000.