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:
1. Compute a predetermined overhead rate for Craig.
2. Compute the overhead variance, and label it as under- or over-applied.
3. Assuming the overhead variance is immaterial, prepare the journal entry to dispose of the variance at the end of the year.
4. Assuming the overhead variance is material, prepare the journal entry that appropriately disposes of the overhead variance at the end of the year.