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12 May, 15:12

PB11.

LO 4.6When setting its predetermined overhead application rate, Tasty Turtle estimated its overhead would be $75,000 and manufacturing would require 25,000 machine hours in the next year. At the end of the year, it found that actual overhead was $74,000 and manufacturing required 24,000 machine hours.

Determine the predetermined overhead rate.

What is the overhead applied during the year?

Prepare the journal entry to eliminate the under - or overapplied overhead.

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  1. 12 May, 17:42
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    1) Overhead Rate: 75,000 / 25,000 = $3 per hour

    2) Overhead Applied: 74,000 * 3 = $72,000

    3) Work in progress / Inventory (Debit) 2,000

    Manufacturing overheads (Credit) 2,000

    Explanation:

    1) Overhead rate: Estimated overhead / Estimated Machine Hours

    Overhead rate: $75,000 / 25,000

    Overhead rate: $3 per hour

    2) Total 24,000 machines hours worked during the period

    Overhead applied: Total hours worked * rate per hour (calculated above)

    Overhead applied: 24,000 * 3

    Overhead applied: $72,000

    3) Actual overhead expenses amounted to $74,000, however actual overhead applied are $72,000 (calculated above), thus there is under-application of $2,000. Following journal entry is made to record this application and charge the same either to finished goods / work in progress or cost of goods sold, depending whether the goods are still in work in process, finished goods or the goods have been sold.

    Work in progress / Inventory (Debit) 2,000

    Manufacturing overheads (Credit) 2,000
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