{"id":221397,"date":"2025-05-29T13:12:41","date_gmt":"2025-05-29T13:12:41","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=221397"},"modified":"2025-05-29T13:12:43","modified_gmt":"2025-05-29T13:12:43","slug":"compute-the-manufacturing-overhead-rate-and-under-or-overapplied-overhead","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/29\/compute-the-manufacturing-overhead-rate-and-under-or-overapplied-overhead\/","title":{"rendered":"Compute the manufacturing overhead rate and under- or overapplied overhead"},"content":{"rendered":"\n

Compute the manufacturing overhead rate and under- or overapplied overhead<\/p>\n\n\n\n

Ikerd Company applies overhead to jobs on the basis of machine hours used. Overhead costs are expected to total<\/p>\n\n\n\n

$300,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $322,000 of overhead costs<\/p>\n\n\n\n

are incurred and 130,000 hours are used.<\/p>\n\n\n\n

Instructions<\/p>\n\n\n\n

(a)<\/p>\n\n\n\n

Compute the manufacturing overhead rate for the year.<\/p>\n\n\n\n

(b)<\/p>\n\n\n\n

What is the amount of under-or overapplied overhead at December 31?<\/p>\n\n\n\n

(c )<\/p>\n\n\n\n

Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold.<\/p>\n\n\n\n

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a “?” .<\/p>\n\n\n\n

After you have completed E2-5, consider the following additional question.<\/p>\n\n\n\n

1.<\/p>\n\n\n\n

Assume that the estimated total overhead for the year changed to $350,000. Determine<\/p>\n\n\n\n

the impact on this change on the overhead rate, the amount of manufacturing overhead<\/p>\n\n\n\n

over(under) applied. Revise the journal to dispose of over (under) applied overhead.<\/p>\n\n\n\n

The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n

(a) Compute the manufacturing overhead rate for the year<\/strong><\/h3>\n\n\n\n

Overhead Rate=Estimated OverheadEstimated Machine Hours=300,000125,000=2.40 per machine hour\\text{Overhead Rate} = \\frac{\\text{Estimated Overhead}}{\\text{Estimated Machine Hours}} = \\frac{300,000}{125,000} = \\boxed{2.40 \\text{ per machine hour}}<\/p>\n\n\n\n

\n\n\n\n

(b) Compute under- or overapplied overhead at December 31<\/strong><\/h3>\n\n\n\n

Applied Overhead=130,000 hours\u00d72.40=312,000\\text{Applied Overhead} = 130,000 \\text{ hours} \\times 2.40 = 312,000 Actual Overhead Incurred=322,000\\text{Actual Overhead Incurred} = 322,000 Underapplied Overhead=322,000\u2212312,000=10,000 underapplied\\text{Underapplied Overhead} = 322,000 – 312,000 = \\boxed{10,000 \\text{ underapplied}}<\/p>\n\n\n\n

\n\n\n\n

(c) Adjusting journal entry to assign underapplied overhead<\/strong><\/h3>\n\n\n\n

Since overhead was underapplied<\/strong>, we increase Cost of Goods Sold (COGS)<\/strong>:<\/p>\n\n\n\n

Journal Entry:<\/strong><\/p>\n\n\n\n

Dr. Cost of Goods Sold     10,000  \n    Cr. Manufacturing Overhead     10,000\n<\/code><\/pre>\n\n\n\n
\n\n\n\n
(1) Impact of revised estimated overhead to $350,000<\/strong><\/h3>\n\n\n\n
New Overhead Rate:<\/strong> 350,000125,000=2.80 per machine hour\\frac{350,000}{125,000} = \\boxed{2.80 \\text{ per machine hour}}<\/p>\n\n\n\n
Applied Overhead at New Rate:<\/strong> 130,000\u00d72.80=364,000130,000 \\times 2.80 = 364,000<\/p>\n\n\n\n
Overapplied Overhead:<\/strong> 364,000\u2212322,000=42,000 overapplied364,000 – 322,000 = \\boxed{42,000 \\text{ overapplied}}<\/p>\n\n\n\n
Revised Journal Entry:<\/strong><\/p>\n\n\n\n
Because overhead is overapplied<\/strong>, we reduce COGS:<\/p>\n\n\n\n
Dr. Manufacturing Overhead     42,000  \n    Cr. Cost of Goods Sold           42,000\n<\/code><\/pre>\n\n\n\n
\n\n\n\n
Explanation)<\/strong><\/h3>\n\n\n\n
Manufacturing overhead includes indirect costs like maintenance, utilities, and depreciation related to production. Since these costs cannot be directly traced to specific jobs, companies allocate them using a predetermined overhead rate, often based on machine hours, labor hours, or units produced.<\/p>\n\n\n\n
In this case, Ikerd Company uses machine hours<\/strong> to allocate overhead. Initially, the company estimated $300,000 in total overhead and 125,000 machine hours. This resulted in a rate of $2.40 per machine hour. When applied to the actual usage of 130,000 hours, the company applied $312,000 of overhead. However, actual overhead incurred was $322,000. The difference\u2014$10,000\u2014is considered underapplied<\/strong>, meaning not enough overhead was allocated compared to what was actually spent. This must be adjusted by increasing COGS, because costs were understated.<\/p>\n\n\n\n
If estimates are revised mid-year (e.g., increasing expected overhead to $350,000), the new rate becomes $2.80 per hour. Applying this to actual usage results in $364,000 of applied overhead. Now, actual overhead is lower than applied, creating a $42,000 overapplied<\/strong> balance. This suggests the company charged too much overhead to production. To correct this, the adjustment reduces COGS, reflecting lower actual expenses.<\/p>\n\n\n\n
Such adjustments ensure financial statements accurately reflect production costs. Regularly reviewing estimates helps maintain accurate costing and profitability analysis, especially in manufacturing environments with fluctuating overhead.<\/p>\n\n\n\n
\"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"
Compute the manufacturing overhead rate and under- or overapplied overhead Ikerd Company applies 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. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-221397","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/221397","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=221397"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/221397\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=221397"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=221397"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=221397"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}