Craig Company uses a predetermined overhead rate to assign overhead to jobs. Because Craig's production is machine intensive, overhead is applied on the basis of machine hours. The expected overhead for the year was $5.7 million, and the practical level of activity is 375,000 machine hours. During the year, Craig used 382,500 machine hours and incurred actual overhead costs of $5.73 million. Craig also had the following balances of applied overhead in its accounts: Work-in-process inventory $ 576,000 Finished goods inventory 624,000 Cost of goods sold 1,800,000 Required: Compute a predetermined overhead rate for Craig. Compute the overhead variance, and label it as under- or overapplied. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Craig Company uses a predetermined
During the year, Craig used 382,500 machine hours and incurred actual overhead costs of $5.73 million. Craig also had the following balances of applied overhead in its accounts:
|
Work-in-process inventory |
$ 576,000 |
|
Finished goods inventory |
624,000 |
|
Cost of goods sold |
1,800,000 |
Required:
- Compute a predetermined overhead rate for Craig.
- Compute the overhead variance, and label it as under- or overapplied.
- Assuming the overhead variance is immaterial, prepare the
journal entry to dispose of the variance at the end of the year. - Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year.
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