Question

Predetermined Overhead Rate, Overhead Variances, Journal Entries

Craig Company uses a predetermined overhead rate to assign overhead to jobs. Because Craig's production is machine intensive, overhead is applied on the basis of machine hours. The expected overhead for the year was $5,767,000, and the practical level of activity is 395,000 machine hours.

   During the year, Craig used 403,000 machine hours and incurred actual overhead costs of $5,801,800. Craig also had the following balances of applied overhead in its accounts:

Work-in-process inventory	$	568,340
Finished goods inventory		602,880
Cost of goods sold		1,968,780

Required:

1. Compute a predetermined overhead rate for Craig. Round your answer to the nearest cent.

$ per machine hour

2. Compute the overhead variance, and label it as under- or overapplied.
$  overapplied

3. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year.

4. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year. If an amount box does not require an entry, leave it blank.

Overhead control	___ ____
Work-in-process inventory	____ _____
Finished goods inventory	_____ ______
Cost of goods sold	____ _____

Answer 1

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Part 1
Expected Overheads	a	$   5,767,000
Level of activity	b	395,000	Machine hours
Predetermined overhead rate	a/b	$            14.60
Part 2
Applied Overheads (403,000 MH*$14.60)		$   5,883,800
Actual Overheads		$   5,801,800
Overapplied overheads		$         82,000
Part 3
Accounts	Debit	Credit
Overhead Control	$         82,000
Cost of Goods Sold		$         82,000
Part 4
Accounts	Debit	Credit
Overhead Control	$         82,000
Work in process inventory		$         14,842
Finished goods inventory		$         15,744
Cost of goods sold		$         51,414
	Amount	Ratio	Over applied	Allocation
Work in process	$       568,340	18.10%	$                     82,000	$          14,842
Finished Goods	$       602,880	19.20%	$                     82,000	$          15,744
Cost of Goods Sold	$   1,968,790	62.70%	$                     82,000	$          51,414
	$   3,140,010			$          82,000