Question

Problem 4-20 Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead [LO4-1, LO4-4, LO4-5] Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year Computer-hours Fixed manufacturing overhead cost Variable manufacturing overhead per computer-hour $ $ 82,000 1,279,000 3.10 During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year: $ 50.000 1,019.000 Computer-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process Finished goods Cost of goods sold 450,000 170,000 1,010,000 2.710.000 Required: 1. Compute the company's predetermined overhead rate for the year. (Round predetermined overhead rate to 2 decimal places.) Overhead rate per computer hour 2. Compute the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.) 3. Determine the cost of goods sold for the year after any adjustment for underapplied or overapplied overhead. (Round predetermined overhead rate to 2 decimal places.)

Answer 1

Ans. 1	Predetermined overhead rate = Total Estimated overhead cost / Estimated computer hours
	$1,533,200 / 82,000
	$18.70	per computer - hour
	*Calculations:
	*Variable manufacturing overhead = Variable manufacturing overhead per computer hour * Budgted computer hours
	$3.10 * 82,000
	$254,200
	*Total estimated overhead cost = Variable manufacturing overhead + Fixed manufacturing overhead
	$254,200 + 1,279,000
	$1,533,200
Ans. 2	First, we need to calculate the overhead applied, then we will be able
	to calculate the over or under applied overhead cost.
	Overhead applied = Actual computer hours * Predetermined overhead rate
	50,000 * $18.70
	$935,000
	Under applied overhead = Actual overhead - Applied overhead
	$1,019,000 - $935,000
	$84,000
	If the applied overhead is less than the Actual overhead
	it means that the overhead is under applied.
Ans. 3	Particulars	Amount
	Un adjusted cost of goods sold	$2,710,000
	Add: Under applied overhead	$84,000
	Adjusted cost of goods sold	$2,794,000
	*Over applied overhead is subtracted & Under applied overhead is added to un adjusted
	cost of goods sold for the calculation of Adjusted cost of goods sold.