Medusa Products uses a job-order costing system. Overhead costs are 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:
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Copy the data in the T-accounts above onto your answer sheet. Compute the amount of 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 under applied or overapplied overhead for the year, and shows 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 under applied or overapplied for the year.