Custom Metal Works Products uses a Job-order costing system. Overhead costs applied to jobs on the basis of machine hours, at the beginning of the year, management estimated that 85,000 machine-hours would be required for the period's estimated level of production. The company also estimated $106,250 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $0.75 per machine hour.
Required:
1. Compute the company's predetermined overhead rate.
2. Assume that during the year the company actually works only 80,000 machine-hours and incurs the following costs in the manufacturing overhead and work in process accounts:
Copy the data in the T-accounts above onto your answer and compute the amount of the overhead cost that would be applied to Work in Process for the year, and make the entry in your T-accounts.
3. Compute the amount of underapplied or overapplied overhead for the year, and show the balance in your Manufacturing overhead T-account. Prepare a journal entry to close out the balance in this account to cost of goods sold.
4. Explain why the manufacturing overhead was underapplied or overapplied for the year.