Waterway Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are estimated to total $346,775 for the year, and machine usage is estimated at 126,100 hours. For the year, $369,500 of overhead costs are incurred and 130,800 hours are used. Manufacturing overhead rate $ per machine hour
Manufacturing Overhead $
Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold.

Waterway Company

Journal entry:

Debit Cost of goods sold $9,800

Credit Manufacturing overhead expense $9,800

To assign the underapplied overhead to cost of goods sold.

Explanation:

a) Data and calculations:

Estimated overhead costs = $346,775

Estimated machine usage = 126,100 hours

Overhead rate applied = $346,775/126,100 = $2.75 per hour

Actual overhead costs = $369,500

Actual machine usage = 130,800 hours

Actual overhead rate = $369,500/130,800 = $2.82

Overhead was underapplied by the difference between actual overhead costs applied and actual overhead.

Actual overhead applied = $2.75 x 130,800 = $359,700

Actual overhead costs = $369,500

Difference (underapplied) is $9,800

When the overhead is underapplied or overapplied because of the rate used based on actual usage, the underapplied overhead is a debit or credit to the cost of goods sold respectively.  While underapplied overhead increases the cost of goods sold, overapplied reduces the cost of goods sold by the amount of under- or over-application.

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