3. Erca, Inc. produces automobile bumpers. Overhead is applied on the basis of m

Question

3. Erca, Inc. produces automobile bumpers. Overhead is applied on the basis of machine hours required for cutting and fabricating. A predetermined overhead application rate of $15.00 per machine hour was established for 2009.

(a.) If 9,000 machine hours were expected to be used during 2009, how much overhead was expected to be incurred?

(b.) Actual overhead incurred during 2009 totaled $135,000, and 9,200 machine hours were used during 2009. Calculate the amount of over-or underapplied overhead for 2009.

(c.) Explain the accounting necessary for the over- or underapplied overhead for the year.

Explanation / Answer

a) 9,000 X $15 = $135,000 b) Charged: 9200 X $15 = 138,000-135,000 = $3,000 overapplied (the company charged more in overhead than was actually incurred) c) Either the $3,000 would be closed out to cost of goods sold, or allocated between work in progress, cost of good sold, and finished product in proportion to the overhead charged in the ending balances of the accounts. For the first method, debit manufacturing costs and credit COGS. For the second, debit manufacturing costs, and credit in proportion each of the other accounts.

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