Problem 2-21B Predetermined Overhead Rate; Disposition of Underapplied or Overap

Question

Problem 2-21B Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead [LO2-1, LO2-7]

Adriana Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Compute the company’s predetermined overhead rate for the year. (Round your answer to two decimal places.)

Compute the underapplied or overapplied overhead for the year. (Round your final answer to the nearest dollar amount.)

3.1

Assume the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the appropriate journal entry to close any underapplied or overapplied overhead directly to Cost of Goods Sold.

3.2 Will this entry increase or decrease net operating income?

Adriana Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Explanation / Answer

Estimated Fixed manufacturing overhead cost                          1,372,800

Estimated Variable manufacturing overhead cost        281,600

            (3.20 * 88,000 hours )

Estimated Total manufacturing cost                                 1,654,400

Divided by estimated Total Computer hours                  88,000 hours

Predetermined overhead rate = $18.8 per hour

Manufacturing overhead cost applied to Work In Progress

            (65,000 * $18.8 per hour )                                                     $1,222,000

            Under applied overhead                                                          $ 98,000

Cost of Goods Sold .......................................$98,000

            Manufacturing Overhead ..................                    $98,000

Since this entry increases cost of goods sold ,it will decrease the net operating profit.

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