Cambridge Manufacturing Company applies manufacturing overhead on the basis of m

Question

Cambridge Manufacturing Company applies manufacturing overhead on the basis of machine hours. At the beginning of the year, the company estimated its total overhead cost to be $296,000 and machine hours to be 14,800. Actual manufacturing overhead and machine hours were $327,000 and 15,800, respectively.

a) Record the actual manufacturing overhead cost incurred.

b) Record the application of manufacturing overhead to production.

c) Record the transfer of manufacturing overhead account balance to cost of goods sold.

Explanation / Answer

Part A)

The journal entry to record actual manufacturing overhead would include a debit to manufacturing overhead and a credit to accounts payable (assuming the overheads have been incurred on an accrual basis). The journal entry is given below:

____________

Part B)

To record the application of manufacturing overhead to production, we will have to calculate the predetermined overhead rate with the use of estimated overhead cost and estimated machine hours.

Predetermined Overhead Rate = Estimated Overheads/Estimated Machine Hours = 296,000/14,800 = $20 per machine hour

Overhead Applied = Actual Machine Hours*Predetermined Overhead Rate = 15,800*20 = $316,000

The journal entry to record overhead applied to production would include a debit to work in process and a credit to manufacturing overhead. The journal entry is given below:

____________

Part C)

In the given case, the overhead has been underapplied to the extent of $11,000 (327,000 - 316,000). This amount of $11,000 will be transferred to the cost of goods sold account. The journal entry is given below:

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