Patel and Sons, Inc., uses a standard cost system to apply overhead costs to uni
ID: 2578846 • Letter: P
Question
Patel and Sons, Inc., uses a standard cost system to apply overhead costs to units produced. Practical capacity for the plant is defined as 54,000 machine hours per year, which represents 27,000 units of output. Annual budgeted fixed overhead costs are $270,000 and the budgeted variable overhead cost rate is $3.30 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,800 units, which took 43,000 machine hours. Actual fixed overhead costs for the year amounted to $263,600 while the actual variable overhead cost per unit was $3.20.
1. Based on the information provided above, provide the correct summary journal entries for actual and applied overhead costs (both variable and fixed) for the year. Assume that the company uses a single account, Factory Overhead, to record both actual and applied overhead. Also, assume that the only variable overhead cost was electricity and that actual fixed overhead consisted of depreciation of $164,000 and supervisory salaries of $96,400. (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2.Based on the information provided above, provide an appropriate end-of-year closing entry for each of the following two independent situations: (a) the net overhead cost variance is closed entirely to Cost of Goods Sold, and (b) the net overhead variance is allocated among WIP Inventory, Finished Goods Inventory, and CGS using the following percentages: 30%, 20%, and 50%, respectively. (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
Plant capacity Per year 54000 machine hrs Output units 27000 Fixed overheads-budgeted $ 270,000 V.oh per unit-budgeeted 3.3 Standard units of production 27000 Budgeted fixed overheads $ 270,000 Standard machine hrs per unit 2 (54000/27000) Standard fixed overhead per machine hr 5 (270000/54000) budgeted fixed oh per unit $ 10 (5*2 hrs) Actual output for the year (units) 20800 Actual machine hours 43000 Actual fixed overhead $ $ 263,600 ---A Allocation of fixed overhead at budgeted rate 208,000 ---B (20800*10 per unit) Under absorption 55,600 (A-B) As the fixed overhead applied on the basis of predetermined rate ($208,000) is lesser than the actual expense ($263,000), there is underabsorption of overhead. Fixed Overheads: Debit $ Credit $ Journal entry for recording of overheads; 1 Fixed overheads control account 263600 Depreciation 164000 Supervisory salaries 96400 Other Sundry expense accounts 3200 (recording of actual fixed overhead expense to the overhead account) 2 Work in Progress 208000 Fixed overheads control acccount 208000 (recovery of fixed overheads as per standard rates. After this allocation, there will be a debit balance in overheads control account by $ 55600) Variable Overheads: Budgeted variable overhead $ 68640 (3.3*20800) - std rate per unit * Actual units) Actual variable overheads $ 66560 (3.2*20800) - Actual rate * actual units Over absorption of var overheads 2080 Journal entry for recording of overheads; 1 Variable overheads control account 66560 Electricity expense 66560 (recording of actual variable overhead expense to the overhead account) 2 Work in Progress 68640 Variable overheads 68640 (recovery of overhead as per predetermined rates) Question 2: (year -end closing entries) During year end closing, usually the over or under absorption of overheads is charged off to the P&L account. However, in this question, the company charges to accounts as follows; 1 Assuming that the overhead variance is closed entirely to cost of goods sold: Under absorption of fixed overheads 55600 Over abosrption of variable overheads -2080 Net under absorption of overheads 53520 If this net under absorption is charged entirely to Cost of goods sold account: Debit $ Credit $ Cost of goods sold account 53520 Variable overheads control account 2080 Fixed overheads control account 55600 (the underabsorbed overhead is being transferred from overheads account to COGS account) 2 Assuming that the overhead variance is closed to the following accounts; Net under absorption of overheads (as arrived above) 53520 Allocated to; WIP Inventory (30%) 16056 F Goods inventory (20%) 10704 Cost of goods sold account (50%) 26760 TOTAL 53520 Journal entry: Debit $ Credit $ WIP Account 16056 Fin goods inventory 10704 Cost of goods sold 26760 Variable overheads control account 2080 Fixed overheads control account 55600 (the underabsorbed overhead is being transferred from overheads account to various accounts)