Hi guys, I often struggle when I face question about overhead incur vs overhead applied; or picking acutal unit or standard unit in calculation of variance. In the question below, why do I need to use overhead Applied instead of overhead incurred? Doesn't overhead incurred represent the amount that factory actually used? Thank you for the help
Under Pick Co.’s job order costing system, manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During January, Pick’s transactions included the following:
Direct materials issued to production $ 90,000
Indirect materials issued to production 8,000
Manufacturing overhead incurred 125,000
Manufacturing overhead applied 113,000
Direct labor costs 107,000
Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January?
A.
$302,000
B.
$310,000
C.
$322,000
Incorrect D.
$330,000
You answered D. The correct answer is B.
Applied overhead is the amount of overhead cost that has been assigned, using estimates of overhead costs and production levels, to finished goods and included in inventory (which will be expensed as part of cost of goods sold). Overhead applied at the standard or estimated rate does not necessarily equal the actual overhead incurred.
The work-in-process inventory at the beginning and end of the month were both zero, so the costs added to work-in-process during the month equal the cost of jobs completed during the month. Those costs included only direct materials ($90,000), overhead applied ($113,000), and direct labor ($107,000), which total $310,000. The indirect materials ($8,000) are part of the overhead costs and should not be included a second time.
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