Question

Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,375,000. 

a. Determine the total factory overhead amount applied. 

b. Compute the over- or underapplied amount for the year. 

c. Journalize the entry to transfer the over- or underapplied factory overhead to cost of goods sold. If an amount box does not require an entry, leave it blank.

Answer 1

First we will calculate pre determined overhead rate as per below:

Pre determined overhead rate = Estimated factory overheads / Estimated machine hours

Pre determined overhead rate = $1250000 / 50000 = $25 per machine hour.

(a) Factory overhead amount applied = Pre determined overhead rate * Actual machine hours

Factory overhead amount applied = $25 * 54300 = $1357500

(b) When the actual overheads are more than the applied overheads then it is the case of under applied overheads and vice versa.

Under applied overhead = Applied overhead - Actual overhead

Under applied overhead = $1357500 - $1375000 = $17500

(c) Required journal entry to transfer under applied overhead to cost of goods sold is:

Debit Cost of goods sold $17500

Credit Manufacturing overhead control account $17500