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) ?

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.