Smith Company applies overhead based on machine hours. The following data was av

Question

Smith Company applies overhead based on machine hours. The following data was available:

Budgeted factory overhead $266,400

Budgeted machine hours 18,500

Actual factory overhead $287,920

Actual machine hours 19,050

Cost of goods sold $560,000

Direct materials inventory, ending balance $60,000

Work-i n-process inventory, ending balance $190,000

Finished goods inventory, ending balance $250,000 Required:

A) Compute the budgeted factory overhead rate.

B) Compute the underapplied or overapplied factory overhead.

C) Under the immediate write-off approach to overhead variances, how would you dispose of the overhead variance?

D) If the immediate write-off approach to overhead variances is not used, how would you dispose of the overhead variance?

Explanation / Answer

A) budgeted factory overhead rate = Budgeted factory overhead / Budgeted machine hour

                                                              = 266,400/18,500 = $14.4 per machine hour

B) With the the above rate of $14.4/hour and actual machine hours=19,050 hours, they will have applied

      14.4 * 19050 = $274,320 of overhead for theactual period.

       But actually factory overhead is $287,920,

       Therefore,

      $274,320 - $287,920 = $13,600 underapplied factory overhead

c) COGS, FDOC = 13,600

(COGS is cost of goods sold, FDOC is factory department overhead control)

d) If the immediate write-off approach to overhead variances is not used, we would dispose of the overhead variance using Proration approach.

(WIP means Work in progress, FG means finished goods)

Proration of the variance meaning that the variance (13,600) needs to be allocated to COGS and the Ending FG inventory (by their value percentage).

Total ending balance = $190,000+$250,000+$560,000= $1,000,000

Ending Balance of WIP = 190,000 (19%)
Ending Balance of FG = 250,000 (25%)
COGS = 560,000 (56%)
Total = 100%

So. the journal then
Overhead control using WIP = .19 * 13,600 = $2,58,4................(1)
Overhead control using FG = .25 * 13,600 = $3,400 ................(2)
Overhead control using COGS = .56*13,600 = $7,616 ................(3)

Total Overhead control = (1) + (2) + (3) = $13,600

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