For the year 2017 ABC is expecting to produce 15,000 units and is expecting to u
ID: 2599662 • Letter: F
Question
For the year 2017 ABC is expecting to produce 15,000 units and is expecting to use 300,000 machine hours in the production of those units. ABC is budgeting $1,800,000 of overhead (indirect manufacturing costs) for the year. For the month of January 1,000 units were produced and 21,000 machine hours were used. Actual overhead used for the month was $160,000 and cost of goods sold was $800,000 (before adjusting for any overhead variance).
a. What is the predetermined overhead rate?
b. What was the overhead variance for the month of January and was it over applied or under applied?
c. What is the cost of goods sold for the month of January after adjustment for the overhead variance?
Explanation / Answer
Step 1 - Calculation of Predetermined Overhead Rate
Predetermined overhead rate =
Budgeted overhead/Budgeted level of activity
Predetermined Overhead rate = $1800000/300000 = $6
Step 2 - Calculation of overhead variance and under & over application of overhead
Overhead Variance = (Actual Ovethead - Applied overhead)
Actual Overhead = $160000
Applied overhead = (Overhead rate * Actual hours)
($6 * 21000 hours) = $126000
Overhead Variance = ($160000 - $126000) = $34000 Underapplied (Because Applied overhead are less than actual overhead)
Step 3 - Cost of goods sold after adjustment for overhead variance
Predetermined overhead rate =
Budgeted overhead/Budgeted level of activity
Predetermined Overhead rate = $1800000/300000 = $6