the manufacturing facility usually experiences 2 000 hours of machine usage per mont 635716

The manufacturing facility usually experiences 2,000 hours of machine usage per month, so Twill adopts a standard overhead allocation rate of $40 per hour of machine usage, which it derives as follows:

$80,000 Average monthly overhead / 2,000 Hours of machine usage = $40/hour allocation rate

During the most recent month, Job 1200 incurred $10,440 of actual overhead costs (see the preceding example). In that month, it used 240 hours of machine time, which at a standard application rate of $40/hour, results in an overhead allocation of $9,600. Thus, the use of a standard overhead rate that is based on an historical average amount of costs incurred results in an $840 reduction in the amount of overhead charged to Job 1200.

In Month 3, the standard $40/hour rate is charged to 2,000 of machine time used, for a total allocation of $80,000. This leaves $7,000 of actual overhead costs remaining in the overhead cost pool (since $87,000 of actual overhead costs were incurred in Month 3). Rather than go through the effort of allocating this residual to any accounts or jobs, the cost accountant elects to charge it directly to the cost of goods sold with the following entry:

The net effect of this adjustment is that Twill records $7,000 more expense in the current month than might otherwise have been the case. If it had instead elected to use the allocation of actual overhead costs, the costs would have remained in the inventory account as an asset until the jobs were billed to customers.