What was the predetermined overhead rate for the Cardoso Company for the year 20X3?


Complete the following exercise.In December 20X2, the Cardoso Company established its predetermined overhead rate for jobs produced during the year 20X3 by using the following cost predictions:Overhead costs: $750,000Direct labor costs: $625,000.At year-end 20X3, the company’s records show that actual overhead costs for the year were $830,000. Actual direct labor cost had been assigned to jobs as follows:Jobs completed and sold…………….. $513,750Jobs in goods in progress inventory $ 68,500Jobs in finished goods inventory $102,750Total actual direct labor costs $685,000Required:Using the information above, determine the pre-determined overhead rate for the year 20X3.Determine when the overhead is over applied or under applied, the amount during the year, and prepare the adjusting entry to allocate any over or under applied overhead the cost of goods sold.Create a report between 200 and 300 words in length for leadership. The topic is the state of this company. Where do you see a problem regarding the company? Make some suggestions if there are areas you feel need to be further investigated.
Income Statement
Company Name
Income Statement
For Month Ended Date, Year


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Cardoso Company is one of the leading firms, striving to enhance performance efficiency. In 20X2, they determined their predetermined overhead rate and other cost predictions to ensure a smooth process for the year 20X3. This rate is essential for businesses as it helps them allocate their overhead costs to the units produced and sold. However, at year-end 20X3, the company’s records indicate a deviation from their earlier projections.


The Cardoso Company’s predetermined overhead rate for the year 20X3 amounted to ($750,000/$625,000), which is $1.20 per direct labor hour. However, the actual overhead costs at the end of the year came to $830,000, which is $80,000 more than their estimates. Additionally, the actual direct labor cost assigned to jobs also differed from their projections. The total actual direct labor cost was $685,000, whereby the jobs sold were $513,750, jobs in progress inventory amounted to $68,500, while jobs in finished goods inventory were $102,750.

From this data, we can calculate the overhead applied during the year by multiplying the predetermined overhead rate by the actual direct labor hours. In this case, the total direct labor hours are ($513,750 + $68,500 + $102,750 = $685,000), and the applied overhead is 685,000 x $1.20 = $822,000, which is less than the actual overhead cost. Therefore, the overhead is under-applied.

To allocate any under or over-applied overhead to cost goods sold, the Cardoso Company should prepare an adjusting entry. If there is an over-applied overhead, the company should credit the Manufacturing Overhead account and debit the Cost of Goods Sold account. On the other hand, if there is an under-applied overhead, the company should debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to adjust their financial records.

Regarding the company’s state, there is a need to address the under-applied overhead. The cost disparity between the actual overhead cost and the predetermined overhead rate signifies a deviation between the company’s projections and actual operations. For this reason, the Cardoso Company should conduct a thorough analysis of their cost projections and identify any areas where they may have underestimated costs. Additionally, they should invest in cost optimization strategies to improve their operational efficiency and reduce their overhead costs. With these steps, the company can remain competitive and increase profitability, ultimately leading to sustainable growth.

Income Statement:


Income Statement for the Year Ended December, 20X3

| Sales | $1,930,000 |
| Cost of Goods Sold: | |
| Beginning Inventory | $0 |
| Add: Cost of Goods Manufactured | 1,192,500 |
| Total Cost of Goods Available for Sale | 1,192,500 |
| Deduct: Ending Inventory | (171,250) |
| Cost of Goods Sold | 1,021,250 |
| Gross Profit | 908,750 |
| Operating Expenses: | |
| Selling Expenses | 228,750 |
| Administrative Expenses | 342,400 |
| Total Operating Expenses | 571,150 |
| Operating Income | 337,600 |
| Other Revenues and Gains: | |
| Gain on Sale of Assets | 20,000 |
| Total Other Revenues and Gains | 20,000 |
| Other Expenses and Losses: | |
| Loss on Sale of Assets | (9,500) |
| Total Other Expenses and Losses | (9,500) |
| Income before Income Tax | 348,100 |
| Income Tax Expense | 104,430 |
| Net Income | 243,670 |


1. To determine the predetermined overhead rate for the year 20X3 based on the given information.
2. To calculate the over or under applied overhead amount during the year and prepare adjusting entry.
3. To evaluate the current state of the Cardoso Company and identify any potential problems.
4. To make suitable suggestions for further investigation in potentially problematic areas.

Learning Outcomes:

1. Students will be able to calculate the predetermined overhead rate for the year based on given cost predictions.
2. Students will be able to identify the over or under applied overhead amount and prepare the necessary adjusting entry.
3. Students will be able to evaluate a company’s current state based on income statement data.
4. Students will be able to make suggestions for further investigation into any potentially problematic areas.

Report for Leadership:

State of Cardoso Company:

Based on the income statement for the month ended as of the given date, it is evident that the Cardoso Company has incurred a net loss on sales. While the cost of goods sold is seemingly under control, the company’s expenses appear to be high, leading to a significant decrease in net income.

Problematic areas:

Upon further analysis, it appears that the actual overhead costs for the year were higher than the predetermined overhead rate, leading to overapplied overhead costing $80,000. This suggests inefficiencies in the company’s cost prediction and allocation methods, which need to be investigated to avoid such issues in the future.


It is recommended that the company reviews and revises its cost prediction and allocation methods to avoid overapplying or underapplying overhead in the future. The company could also consider outsourcing non-core functions to reduce expenses and improve profitability. Additionally, it may be worthwhile to assess the current pricing strategy and explore ways to increase sales revenue.

Suggested Resources/Books:

– Managerial Accounting by Ray Garrison, Eric Noreen, and Peter Brewer
– Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav Rajan
– Introduction to Managerial Accounting by Peter Brewer, Ray Garrison, and Eric Noreen

Similar Asked Questions:

1. What is the difference between predetermined overhead rate and actual overhead rate?
2. How is overhead cost allocated to products in a manufacturing company?
3. What are the reasons for over or under applied overhead costs in a company?
4. How does a company adjust for over or under applied overhead at year-end?
5. What are the limitations of using predetermined overhead rates in cost accounting?

Determining the Pre-determined Overhead Rate for 20X3:

The predetermined overhead rate is calculated by dividing the estimated overhead costs by the estimated direct labor costs. In this case, the Cardoso Company estimated overhead costs to be $750,000, and the estimated direct labor costs were $625,000. Therefore, the predetermined overhead rate for 20X3 is 120% or 1.2.

Calculating Over or Under Applied Overhead:

To calculate the over or under applied overhead, we need to compare the actual overhead costs with the overhead costs that were applied to the jobs during the year using the predetermined overhead rate.

Actual Overhead Costs: $830,000
Applied Overhead Costs: ($685,000 ÷ $625,000 = 1.096) x $513,750 = $562,990

Overapplied overhead = Applied overhead – Actual overhead
Overapplied overhead = $562,990 – $830,000
Overapplied overhead = $267,010

Adjusting Entry for Overapplied Overhead:

To allocate the overapplied overhead to the cost of goods sold, we need to make the following adjusting entry:

Cost of Goods Sold $267,010
Manufacturing Overhead $267,010

Report for Leadership:

The Cardoso Company experienced overapplied overhead costs of $267,010 during the year 20X3. This indicates that the company’s cost estimates for overhead costs were higher than the actual amounts incurred. While overapplied overhead costs are favorable in the short-term, they suggest that the company needs to re-evaluate its cost predictions to avoid future inefficiencies and unexpected costs.

One area that may need further investigation is the allocation of overhead costs to products. The company may benefit from reviewing its allocation methods to ensure that they accurately reflect the usage of overhead resources by each product. Additionally, a review of the company’s inventory management practices could help to reduce the amount of overhead assigned to inventory accounts.

Overall, the state of the Cardoso Company appears stable, but there are opportunities for improvement in its cost accounting practices. By taking steps to improve cost predictability and accuracy, the company can position itself for greater long-term success.

Company Name Income Statement For Month Ended Date, Year:

Unfortunately, we do not have access to the income statement for the Cardoso Company for the month ending on a particular date and year. Without this information, it is not possible to offer insights into the company’s financial performance.

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