Question

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Practice Problem 3 Overhead Application; Predetermined Overhead Rate Rayburn Company uses a predetermined overhead rate to assign overhead to jobs. Because Rayburn's production is machine-dominated, overhead is applied on the basis of machine hours. The expected overhead for the year was $2.5 million, and the expected level of activity is 50,000 machine hours. During the year, Rayburn used 48,000 machine hours and incurred actual overhead costs of $2 million. Rayburn also had the following ending balances of applied overhead in its accounts. Work in Process $ 460,000 Cost of Goods Sold $1,460,000 Finished Goods $500,000 REQUIRED: 1. Compute a predetermined overhead rate for Rayburn. 2. Calculate the Applied OH. 3. Compute the overhead variance, and label it as under-or over-applied. 4. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year. 5. Assuming the overhead variance is material, prepare the journal entry to dispose of the variance at the end of the year

Answer 1

Solution 1:

Predetermined overhead rate = Expected overhead / expected machine hours = $2,500,000 / 50000 = $50 per Machine hour

Solution 2:

Applied Overhead = $50 *48000 = $2,400,000

Solution 3:

Overhead Variance = Applied overhead - Actual Overhead = $2,400,000 - $2,000,000 = $400,000 Overapplied

Solution 4:

Account Title	Debit	Credit
Manufacturing Overhead Dr	$4,00,000
To Cost of Goods Sold		$4,00,000

Solution 5:

Account Title	Debit	Credit
Manufacturing Overhead Dr	$4,00,000
To Work in Process Inventory (400000*460000/2420000)		$76,033
To Cost of goods sold (400000*1460000/2420000)		$2,41,322
To Finished Goods Inventory (400000*500000/2420000)		$82,645