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Ikerd Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $322,000 of overhead costs are incurred and 130,000 hours are used. Instructions (a) Compute the manufacturing overhead rate for the year. (b) What is the amount of under- or overapplied overhead at December 31? (c) Prepare the adjusting entry to assig

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Answer:

a.  $2.4

b. $10,000 under-applied

c. Cost of goods sold A/c Dr $10,000

      To Manufacturing overhead    $10,000

Explanation:

a. The computation of the manufacturing overhead rate is shown below:

Manufacturing overhead rate = (Total estimated manufacturing overhead) ÷ (estimated direct labor-hours)

= $300,000 ÷ 125,000 hours

= $2.4

(B) Now we have to find the actual overhead which equals to

= Actual direct labor-hours × predetermined overhead rate

= 130,000 hours × $2.4

= $312,000

So, the ending overhead equals to

= Actual manufacturing overhead - actual overhead

= $322,000 - $312,000

= $10,000 under-applied

c. The adjusting entry is shown below:

Cost of goods sold A/c Dr $10,000

      To Manufacturing overhead    $10,000

(Being the under-applied overhead is adjusted)

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The manufacturing overhead rate for Ikerd Company will be $2.4 per unit. The under applied overhead cost is computed as $10,000. The adjusted journal entries are attached along with an image for reference.

How to calculate Overhead Costs?

Applying the information given, the manufacturing overhead costs per unit will be calculated using the formula as below,

[tex]\rm Manufacturing\ Overhead\ Rate= \dfrac{Total\ Manufacturing\ Overheads }{Total\ Direct\ Labor\ Hours}\\\\\rm Manufacturing\ Overhead\ Rate= \dfrac{300000}{125000} \\\\\rm Manufacturing\ Overhead\ Rate= \$2.4\\\\[/tex]

To ascertain whether the costs are under-applied or over-applied, the following formula will be used,

[tex]\rm Actual\ Manufacturing\ Overhead = Direct\ Labor\ Hours\ x\ Overhead\ Rate \\\\\rm Actual\ Manufacturing\ Overhead = 130000\ x\ 2.4\\\\\rm Actual\ Manufacturing\ Overhead = \$312000[/tex]

However, the estimated overheads are given as $322,000. So, the overheads will be under-applied by $10,000 as there is a positive balance between the amounts.

Hence, the manufacturing overhead rate for the year is calculated as $2.4 per unit. The under-applied overhead cost is $10000 and the adjusted journal entries are attached with the image for reference.

Learn more about Overhead Costs here:

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