Question

Problem 15-4A Overhead allocation and adjustment using a predetermined overhead rate LO P3, P4

At the beginning of the year, Learer Company’s manager estimated total direct labor cost assuming 55 persons working an average of 2,000 hours each at an average wage rate of $20 per hour. The manager also estimated the following manufacturing overhead costs for the year.

Indirect labor	$	261,200
Factory supervision		156,000
Rent on factory building		152,000
Factory utilities		100,000
Factory insurance expired		80,000
Depreciation—Factory equipment		480,000
Repairs expense—Factory equipment		72,000
Factory supplies used		80,800
Miscellaneous production costs		48,000
Total estimated overhead costs	$	1,430,000

At year-end, records show the company incurred $1,711,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $616,000; Job 202, $575,000; Job 203, $310,000; Job 204, $728,000; and Job 205, $326,000. In addition, Job 206 is in process at the end of the year and had been charged $29,000 for direct labor. No jobs were in process at the beginning of the year. The company’s predetermined overhead rate is based on direct labor cost.

Required
1-a. Determine the predetermined overhead rate for the year.
1-b. Determine the total overhead cost applied to each of the six jobs during the year.
1-c. Determine the over- or underapplied overhead at the year-end.
2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of the year.

Answer 1

Solution 1a:

Predetermined overhead rate = Total overhead / Total Direct labor cost

= $1430000 / (55*2000*$20) = $1430000/$2200000 = 65%

Solution 1b:

Computation of Overhead cost Applied to Jobs
Job no.	Direct Labor	Overhead Cost applied (65%)
201	$6,16,000	$4,00,400
202	$5,75,000	$3,73,750
203	$3,10,000	$2,01,500
204	$7,28,000	$4,73,200
205	$3,26,000	$2,11,900
206	$29,000	$18,850
Total	$25,84,000	$16,79,600

Solution 1c:

Factory Overhead
Actual Overhead	$17,11,000	Applied	$16,79,600
Balance (Under-applied)	$31,400

Solution 2:

Journal Entries
Particulars	Debit	Credit
Cost of Goods sold Dr	$31,400
To Factory Overhead		$31,400
(To allocate under applied overhead)