6. At the beginning of the year, Gaudi Company estimated the following: Overhead

Question

6. At the beginning of the year, Gaudi Company estimated the following: Overhead $432,000 Direct labor hours 90,000

Gaudi uses normal costing and applies overhead on the basis of direct labor hours. For the month of January, direct labor hours were 7,650. By the end of the year, Gaudi showed the following actual amounts:

Overhead $436,000 Direct labor hours 89,600

Assume that unadjusted Cost of Goods Sold for Gaudi was $707,000.

Required:

a. Calculate the predetermined overhead rate for Gaudi.

b. Calculate the total applied overhead for the year. Was overhead over- or underapplied? By how much?

c. Calculate adjusted Cost of Goods Sold after adjusting for the overhead variance.

Explanation / Answer

a. The predetermined overhead rate for Gaudi = Total estimated overhead / Budgeted direct labor hours = $ 432,000 / 90,000 = $ 4.8 per direct labor hour

b. The total applied overhead for the year = 89,600 x $ 4.8 = $ 430,080. As the overhead applied is less than the actual overhead incurred, overhead was under-applied by $ ( 436,000 - 430,080) = $ 5,920

c. Adjusted cost of goods sold = Unadjusted cost of goods sold + Actual overhead incurred - Overhead applied = $ 707,000 + $ 436,000 - $ 430,080 = $ 712,920.

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