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BEC MCQ – Job Costing and Application of Factory Overhead

Echo Company uses a normalized job costing system and applies factory overhead on the basis of machine hours. Echo’s yearly profit plan disclosed anticipated factory overhead of $4,800,000 if 200,000 machine hours are worked. By year end, actual factory overhead charges and machine hours worked amounted to $4,730,000 and 215,000, respectively. What amount correctly states the factory overhead applied to Echo’s actual year-end overhead?

A) $70,000 overapplied

B) $360,000 overapplied

C) $430,000 overapplied

D) $430,000 underapplied

$430,000 overapplied is correct. You should immediately identify that machine hours is the cost driver used by Echo Company in their job costing system. To understand whether factory overhead was overapplied vs underapplied, we need to calculate what the applied factory overhead was using the standard rate. We don’t have the standard rate, so that is our starting point.

Step 1) Our first step is to calculate the standard rate for factory overhead per machine hour. If they anticipated $4,800,000 of factory overhead on 200,000 machine hours, just divide, $4,800,000 by 200,000 hours, and you get $24 per machine hour.

Step 2) Now we need to determine what level of factory overhead was applied to jobs by Echo based on the standard rate of $24 per machine hour and 215,000 machine hours. $24 x 215,000 = $5,160,000 of applied factory overhead.

Step 3) Since the company would have applied $5,160,000 of factory overhead to jobs throughout the year based on their standards, and the company only actually incurred $4,730,000, then that means Echo Company overapplied factory overhead by $430,000.

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