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16 April, 02:16

Pack, Inc. applies manufacturing overhead on the basis of machine hours. The following estimates were used for the current year: Estimated Machine Hours 200,000 Estimated Manufacturing Overhead $1,000,000 Actual machine hours were 202,000 and actual manufacturing overhead was $1,005,000. What was Pack's over - or under-applied overhead for the year and what was its effect on cost of goods sold (prior to adjustment) ?

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  1. 16 April, 05:25
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    Instructions are below.

    Explanation:

    Giving the following information:

    Estimated Machine Hours 200,000

    Estimated Manufacturing Overhead $1,000,000

    Actual machine hours were 202,000

    actual manufacturing overhead was $1,005,000.

    First, we need to calculate the estimated overhead rate for the period:

    Estimated manufacturing overhead rate = total estimated overhead costs for the period / total amount of allocation base

    Estimated manufacturing overhead rate = 1,000,000/200,000 = $5 per machine hour

    Now, we can allocate overhead based on actual hours:

    Allocated MOH = Estimated manufacturing overhead rate * Actual amount of allocation base

    Allocated MOH = 5*202,000 = $1,010,000

    Finally, we need to determine the under/over allocation:

    Under/over applied overhead = real overhead - allocated overhead

    Under/over applied overhead = 1,005,000 - 1,010,000 = 5,000 overallocated

    The effect on the cost of goods sold is that it will be overestimated in the income statement.
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