FedY is a specialized packaging company that packages other manufacturers\' prod
ID: 2417722 • Letter: F
Question
FedY is a specialized packaging company that packages other manufacturers' products. Other manufacturers ship their products to FedY in bulk. FedY than packages the products using high-speed, state-of-the-art packaging machines and ships the packaged products to wholesalers. A typical order involves packaging small toys in see-through plastic and cardboard containers. FedY uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs based on machine hours. The annual flexible overhead budget is projected to be $6 million of fixed costs and $120 per machine hour. The budgeted number of machine hours for the year is 20,000. At the end of the year, 21,000 machine hours were used and actual overhead incurred was $9.14 million. REQUIRED: 1. Calculate the overhead rate at the beginning of the year. 2. Calculate the amount of over/underabsorbed overhead for the year. 3. The company's policy is to write off any over/underabsorbed overhead to cost of goods sold. Will net income rise or fall this year when the over/underabsorbed overhead is written off to cost of goods sold? Why? FedY is a specialized packaging company that packages other manufacturers' products. Other manufacturers ship their products to FedY in bulk. FedY than packages the products using high-speed, state-of-the-art packaging machines and ships the packaged products to wholesalers. A typical order involves packaging small toys in see-through plastic and cardboard containers. FedY uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs based on machine hours. The annual flexible overhead budget is projected to be $6 million of fixed costs and $120 per machine hour. The budgeted number of machine hours for the year is 20,000. At the end of the year, 21,000 machine hours were used and actual overhead incurred was $9.14 million. REQUIRED: 1. Calculate the overhead rate at the beginning of the year. 2. Calculate the amount of over/underabsorbed overhead for the year. 3. The company's policy is to write off any over/underabsorbed overhead to cost of goods sold. Will net income rise or fall this year when the over/underabsorbed overhead is written off to cost of goods sold? Why?Explanation / Answer
Answer:
1) Calculation of Overhead Rate at the beginning of the year
Overhead Rate per Machine Hours = Total Estimated Fixed Overhead / Total Estimated Machine Hours = $6,000,000 / 20,000 = $300 per machine hours
2) Calculation of amount of Over/Under absorbed overhead for the year:
Estimated Overheads (Budgeted) on the basis of Actual Machine Hours worked = 21,000 Machine Hours x $300 budgeted overhead rate = $6,300,000
Actual Overhead Incurred = $9,140,000
Here, budgeted overheads are less than Actual Overhead, that means the overheads are under absorbed.
Under Absorbed Overhead = Actual Overhead - Estimated Overheads = $9,140,000 - $6,300,000 = $2,840,000
3) Under-absorption is represented by a Debit balance in the account. To writte off Under Absorbed Overhead company will have to pass following journal entry
Cost of Goods Sold A/c Dr. $2,840,000
To Under Absorbed Ovehead A/c $2,840,000
Under Absorbed Overheads will increase the cost of goods sold, therefore the net income of the company will fall this year.
Reason being --- actual overhead incurred is higher than estimated. Thats why company will have to adjust their estimated profit according to actual overhead incurred.
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