Manufacturing overhead was estimated to be $250,000 for the year along with 20,000 direct labor hours.Actual manufacturing overhead was $225,000,and actual direct labor hours were 19,000.To dispose of the balance in the Manufacturing Overhead account,which of the following would be correct?

Question

Quizplus · Accepted Answer

Manufacturing overhead is applied based on a predetermined overhead rate, which is calculated using the estimated overhead and estimated direct labor hours. In this case, the predetermined overhead rate is $250,000 / 20,000 hours = $12.50 per direct labor hour.

Actual overhead incurred is then compared to applied overhead based on actual direct labor hours. The difference between actual overhead and applied overhead is called the overhead variance. In this case, the overhead variance is $225,000 - ($12.50 x 19,000) = $25,000 unfavorable.

To dispose of the balance in the Manufacturing Overhead account, the overhead variance must be closed out to the Cost of Goods Sold account. Since the variance is unfavorable, it means that more overhead was incurred than applied. Therefore, Cost of Goods Sold would be credited for the amount of the variance, which is $12,500 ($25,000 divided by 2).

So, the correct answer is B) Cost of Goods Sold would be credited for $12,500.

Manufacturing Overhead Was Estimated to Be $250,000 for the Year