Question

The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system April 3e May 31 Inventories Raw materials Work in process Finished goods $47,000 11,000 67,000 $ 60,000 22,900 43,600 Activities and information for May Raw materials purchases (paid with cash) Factory payroll (paid with cash) Factory overhead 218,000 361,00e Indirect materials Indirect labor Other overhead costs 23,000 88,000 128,000 1,480,000 Sales (received in cash) Predetermined overhead rate based on direct labor cost 80% Determine whether there is over or underapplied overhead Factory Overhead

Answer 1

Solution:

Generally, the manufacturing overhead costs are applied on predetermined basis by calculating a predetermined overhead rate of the company in order to find out the total cost of a product.

Manufacturing Overhead Costs are applied on some allocation basis. Allocation base may be direct labor hour, direct labor cost or machine hour etc as per the companies policy.

Since Manufacturing overheads are applied on estimation basis the actual manufacturing overheads may differ from applied overheads.

If Factory Overhead applied is less than the actual manufacturing overheads, the overheads are called under applied.

If Factory Overhead applied is greater than the actual manufacturing overheads, the overheads are called over applied.

Calculation of Actual Factory Overhead Incurred:

	$$
Indirect materials	$23,000
Indirect labor	$88,000
Other overhead costs	$128,000
Actual Factory Overhead	$239,000

Applied Factory Overhead = Direct labor cost x predetermined overhead rate 80%

In the question Factory Payroll is only given. There is no information about Direct Labor Cost. It is assumed that Factory Payroll Consist Direct Labor Cost as well as Indirect labor cost.

So, the Direct Labor Cost = Total Factory Payroll $361,000 - Indirect Cost $88,000 = $273,000

Applied Factory Overhead = Direct Labor Costs $273,000 x 80% = $218,400

Applied factory overhead is less than actual factory overhead, it means overheads are UNDER Applied by $20,600 (239,000 - 218,400)

Under Applied Factory Overhead = $

Recording of over applied overhead cost to cost of goods sold

Transaction	General Journal	Debit	Credit
1	Cost of Goods Sold	$20,600
	Factory Overhead (Under APplied Overhead)		$20,600

In case Factory Payroll total cost assumed Direct Labor Cost, the answer will be different.

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