Case Study

Predetermined overhead rate is calculated by dividing the budgeted overhead by the budgeted activity. Since the process related to production is based on machine related activities and entity has implemented the traditional costing system and thus predetermined overhead rate is used for the overhead application. In the given case the machine hour will be used as the base for determining the predetermined overhead rate.
Given is the following information:
Budgeted overhead = $3,600,000
Machine hour = 80,000
Predetermined overhead rate = 3,600,000/80,000 = 45
Solution 1:
Calculation of amount of manufacturing overhead applied to jobs for the period 1July 2018 to 31 May 2019:
Total manufacturing overhead = $3,300,000
Machine hours = 7800 hours
Overhead applied = Machine hour* predetermined overhead rate
= 73000 hour*$45
= $3,285,000
Solution 2:
Calculation of amount of manufacturing overhead applied to jobs during June 2019:
    Job numbers
    Machine hours
    
    
    B12-008
    300
    K12-009
    1,000
    K12-011
    1,400
    L15-005
    2,500
    L15-006
    800
    Total
    6,000
Overhead applied = Machine hour* predetermined overhead rate
= 6000 hour*$45
= $270,000
Solution 3:
Calculation of under-applied/ Over-applied overhead at June 30,2019
    Particulars
    Amount($)
    Actual Overhead (3,300,000+288,000)
    3,588,000
    Applied Overhead ( $3,285,000+ $270,000)
    3,555,000
    
    
    Under-applied Overhead
    33,000
Solution 4:
Overhead costs are costs that cannot be directly identified and apportioned to the products. Thus the small firms uses predetermined overhead rate which is generally calculated at the starting of the financial year. Since the predetermined overhead rate is an estimate and thus the overhead can be under-applied or over-applied.
There are two methods of disposing the over-applied and under-applied overhead which are as:
a) Cost of goods sold method
b) Allocating cost between work in progress and finished goods.
The allocation of the under applied or over applied overhead is mainly based upon the importance of the amount of overhead. In other words when the amount is not important then it is transferred to cost of goods sold account which is termed as cost of goods sold method. When the overhead is under applied i.e. actual overhead is more than of applied overhead and there is immaterial amount of overhead which was applied to production and the end process will result in increase to cost of goods sold. In such case following journal entry will be passed by debiting cost of goods sold and crediting manufacturing overhead. On the other hand the over-applied overhead reflects that the applied overhead is more than that of actual overhead and the excess overhead was allocated to production which will result in decrease of cost of goods sold. In such case following journal entry is passed by debiting manufacturing overhead and cost of goods sold is credited.
Alternatively, when...