Rex has a bakery that specializes in dog treats in a variety of sizes and flavor

Question

Rex has a bakery that specializes in dog treats in a variety of sizes and flavors. Rex uses a flexible budget to forecast manufacturing overhead, which is then allocated to products based on oven hours. The annual flexible overhead budget is estimated to be $200,000 plus $15 per oven hour. The budgeted number of oven hours for the year is 20,000. At the end of the year, it turns out that 22,000 oven hours were used and actual overhead costs totaled $530,000. A.Calculate the overhead application rate at the beginning of the year B. Calculate the amount of under/over-absorbed overhead for the year. C. The policy is to write off any under/over-absorbed overhead to Cost of goods sold at the end of the year, Will Rex’s net income rise or fall this year when the under/over-absorbed overhead is closed out?

Explanation / Answer

Information as given in question is as follows:

A.

Overhead application rate is calculated as under:

Budgeted manufacturing overhead cost/Budgeted labour hours

= 500,000/20,000= 25 per hour.

B.

Under/over absorbed overhead is calculated as under:

Actual manufacturing overhead-Applied manufactruring overhead

= $530,000- $550,000

= -$20,000 over applied overhead.

c.

Over applied overhead will be write-off to Cost of goods sold as follows:

Manufacturing overhead 20,000

Cost of goods sold 20,000

Income will increase.

Flexible overhead Budget $200,000 plus $15 per hour Budheted oven hours 20,000 hours Actual overhead $530,000 Actual hours 22,000 hours

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