11. Totomato Tires Company (TTC) uses machine hours to determine its predetermin

Question

11. Totomato Tires Company (TTC) uses machine hours to determine its predetermined overhead rates. At the beginning of the year, JGC estimated its 2013 machine hours to be 10,000 hours and estimated its 2013 manufacturing overhead to be $1,500,000. Actual 2013 machine hours were 11,000 hours, and actual 2013 manufacturing overhead was $1,800,000. At the end of the year, TTC made an accounting entry to include the over-applied or under- applied overhead in cost of goods sold. What impact did that entry have on TTC's net operating profit? A. Reduce net operating income by $150,000. B. Reduce net operating income by $50,000. C. Increase net operating income by S300,000. D. Reduce net operating income by $300,000. E. Increase net operating income by $150,000.

Explanation / Answer

What impact did the entry have on TTC Net operating Profit?

Answer: The Budgeted manufacturing overheads are $1,500,000 and the actual manufacturing overheads are $1,800,000. This is the case of under applied overheads which will be charges to the cost of goods sold which will effect the operating profit. As overheads are expenses the net operating profit will reduce by the same amount. So, here thr answer is the entry will Reduce Net Operating Profit by $300,000.

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