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 overhcad 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 $300,000. D. Reduce net operating income by $300.000. E. Increase net operating income by S150,000.

Explanation / Answer

The answer is A. Reduce net operating income by 150000

Predetermined overhead rate is 1500000/10000= 150

Overhead as per predetermined overhead rate is 11000*150= 1650000

The actual over head are more than overhead by 150000 (1800000-1650000)

Here the overhead are under absorbed.

So, after the entry the operating income will reduce by 150,000

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