Question

Factory Overhead Rates, Entries, and Account Balance Sundance Solar Company operates two factories. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows: Factory 1 Factory 2 Estimated factory overhead cost for fiscal year beginning March 1 $12,900,000 $10,200,000 Estimated direct labor hours for year 250,000 Estimated machine hours for year 600,000 $12,990,000 Actual factory overhead costs for March $10,090,000 245,000 Actual direct labor hours for March Actual machine hours for March 610,000

Answer 1

a. Determine the factory overhead rate for Factory 1. [Refer working note 1]
$21.50	per machine hour
b. Determine the factory overhead rate for Factory 2. [Refer working note 2]
$40.80	per direct labor hour

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c. Journalize the entries to apply factory overhead to production in each factory for March.
Factory 1	Work in process             [Actual machine hours x Overhead rate = 610,000 hours x $21.50]	$13,115,000
	Factory Overhead		$13,115,000
Factory 2	Work in process               [Actual direct labor hours x Overhead rate = 245,000 hours x $40.80]	$9,996,000
	Factory Overhead		$9,996,000

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d. Determine the balances of the factory overhead accounts for each factory
Factory 1          [Actual overhead - Overhead applied = $12,990,000 - $13,115,000]	$125,000	Credit	Overapplied
Factory 2           [Actual overhead - Overhead applied = $10,090,000 - $9,996,000]	$94,000	Debit	Underapplied
Note: If overhead applied is more than the actual overhead, then overhead is considered to be over-applied If overhead applied is less than the actual overhead, then overhead is considered to be under-applied

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Working note 1 - Computation of overhead rate for Factory 1
Estimated factory overhead cost              (a)	$12,900,000
Estimated machine hours                         (b)	600,000
Overhead rate                                       (a / b)	$21.50
Working note 2 - Computation of overhead rate for Factory 2
Estimated factory overhead cost              (a)	$10,200,000
Estimated direct labor hours                    (b)	250,000
Overhead rate                                       (a / b)	$40.80