Over/under-absorbed Sam is the CFO of a large soda producer (His Cola, if you’re

Question

Over/under-absorbed

Sam is the CFO of a large soda producer (His Cola, if you’re interested). Sam estimates his company’s overhead will be $10,000,000 for the year. He chooses to allocate the overhead based on machine hours. At the time, he anticipates his firm will use 250,000 machine hours. During the year, his firm actually incurs $11,000,000 of overhead and used 260,000 machine hours.

A. How much overhead was absorbed during the year if Sam uses machine hours to allocate the overhead?

B. Was Sam’s Cola over or under absorbed for the year and by how much?

C. If the amount from b) is closed out into cost of goods sold, what would the journal entry be?

Explanation / Answer

Statement showing computations Particulars Amount a) Estimated overhead    10,000,000.00 Estimated Machine hours          250,000.00 Predetermined overhead rate = 10m/250,000                     40.00 Actual Machine Hours          260,000.00 Overhead absorbed = 260,000*40    10,400,000.00 b) Actual Overhead    11,000,000.00 Since absorbed O/H is less than Actual overhead are under applied Under Applied O/H = 11m - 10.4m          600,000.00 c) UnderApplied Overhead Journal Entry Particulars Dr Amt Cr Amt Cost of Goods Sold Dr          600,000.00 To Manufacturing Overhead         600,000.00

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