Question

Problem 2-16. Predetermined overhead rates in a service Company; over- or under- applied overhead [lo 5, 6] Rosemont Music is a musical instrument repair facility located in Akron, Ohio. The repair shop uses a job-order costing system and applies overhead costs to repair jobs on the basis of repair technician hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:
Repair technician hours   10,000 Estimated overhead costs   $170,000
During the year, the opening of another musical instrument repair shop in the same area resulted in fewer repair jobs being worked at Rosemont Music. The company’s cost records revealed the following actual cost and operating data for the year:
Technician hours 7,000 Overhead costs $140,000

Required
a. Compute the company’s predetermined overhead rate.

b. Compute the under- or overapplied overhead.

c. Assume that the company closes any under- or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry.

Answer 1

Estimated overhead costs = $170,000

Estimated  technician hours =10,000

a. Compute the company’s predetermined overhead rate. = $170,000 / 10,000 =$17 per technician hour

b. Compute the under- or over-applied overhead.

Actual  Overhead costs =$140,000

Overhead Applied = Actual technician hours x $17 per technician hour = 7,000 x $17 =$119,000

Under applied =$140,000 - $119,000 =$21,000

c. Assume that the company closes any under- or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry

Cost of Goods Sold ..Dr..$21,000

Manufacturing Overhead....Cr. $21,000