Question

amilton Company applies manufacturing overhead costs to products based on direct labor hours. The company estimates manufacturing overhead cost for the year to be $252,000 and direct labor hours to be 20,000. Actual overhead and actual direct labor hours for the year were $265,000 and 22,200 hours, respectively. Required: 1. Compute over- or underapplied overhead. 2a. Which accounts will be affected by the over- or underapplied manufacturing overhead

Answer 1

Answer:

a) $ 13000 under applied

b) Cost of goods sold    $ 13,000 Debit

Factory Overhead  $ 13000 Credit

Explanation:

Estimated Manufacturing overhead  $252,000

Actual overhead  $265,000

Estimated Direct labor hours  20,000

Actual direct labor hours 22,200

Actual overhead-Estimated Manufacturing overhead=  $265,000 -$252,000

= $ 13000 under applied

When actual overhead is greater than estimated overhead then it under applied and if estimated overhead is greater than actual it is over applied.

Accounts affected by over and under applied overhead are cost of goods sold and work in process accounts.

The under applied overhead is debited to cost of goods sold account and Factory Overhead is credited to ensure the transfer of the remaining part of the factory overhead.

Similarly over applied overhead is credited to cost of goods sold account and Factory Overhead is debited to ensure the removal of the additional part of the factory overhead from cost of goods sold.

The entry in the above example would be

Cost of goods sold    $ 13,000 Debit

Factory Overhead  $ 13000 Credit