Question

In December 2016, Learer Company’s manager estimated next year’s total direct labor cost assuming 40 persons working an average of 3,000 hours each at an average wage rate of $20 per hour. The manager also estimated the following manufacturing overhead costs for 2017.

Indirect labor $321,200
Factory supervision 156,000
Rent on factory building 142,000
Factory utilities 90,000
Factory insurance expired 70,000
Depreciation—Factory equipment 490,000
Repairs expense—Factory equipment 62,000
Factory supplies used 70,800
Miscellaneous production costs 38,000
Total estimated overhead costs $1,440,000

At year-end, records show the company incurred $1,542,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $606,000; Job 202, $565,000; Job 203, $300,000; Job 204, $718,000; and Job 205, $316,000. In addition, Job 206 is in process at the end of the year and had been charged $19,000 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 2017.
1-b. Determine the total overhead cost applied to each of the six jobs during 2017.
1-c. Determine the over- or underapplied overhead at year-end 2017.
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 2017.

Answer 1

a) the predetermined overhead rate for 2017 is 60%

b) the total overhead cost is $1,514,400

c) Underapplied overhead is $27600

d)

Date General journal Debit Credit

Dec. 31 Cost of goods sold $36,400

Factory overhead $36,400

Step-by-step explanation:

a) the predetermined overhead rate for 2017 is the ratio of estimated overhead cost to estimated direct labor cost

estimated direct labor cost = 40 persons × 3000 hours × $20 per hour = $2,400,000

the predetermined overhead rate for 2017 = estimated overhead cost / estimated direct labor cost = $1440000 / $2400000 = 0.6 = 60%

the predetermined overhead rate for 2017 is 60%

b) Overhead cost = direct labor × overhead rate

Job 201 Overhead cost =$606000 × 0.6 = $363600

Job 202 Overhead cost =$565000 × 0.6 = $339000

Job 203 Overhead cost =$300000 × 0.6 = $180000

Job 204 Overhead cost =$718000 × 0.6 = $430800

Job 205 Overhead cost =$316000 × 0.6 = $189600

Job 206 Overhead cost =$19000 × 0.6 = $11400

the total overhead cost = $363600 + $339000 + $180000 + $430800 + $189600 + $11400 = $1,514,400

the total overhead cost is $1,514,400

c) actual overhead costs = $1,542,000

the total overhead cost = $1,514,400

Underapplied overhead = actual overhead costs - total overhead cost = $1542000 - $1514400 = $27600

d)

Date General journal Debit Credit

Dec. 31 Cost of goods sold $36,400

Factory overhead $36,400

Answer 2

1a. Predetermined Overhead Rate= 60%

Step-by-step explanation:

Predetermined Overhead Rate=

Estinated overhead cost/Direct labor cost= $1,440,000/(40*$20*3000)

=60%

1b. Total Overhead Cost applied to each job

Job No Direct Labor Applied FOH60%

201 606,000 363,600

202 565,000 339,000

203 300,000 180,000

204 718,000 430,800

205 316,000 189,600

206 19,000 11,400

Total $2,524,000 $1,513,600

Overhead cost applied=

Direct Labor (1.b) * Predetermine overhead rate (1.a)

example:

(Job No. 201) 606,000 * 0.6 = 363,600

1c. Over applied or under applied at year end 2017

Actual Over head cost $1,542,000

Less:Overhead Appied - $1,513,600

Under applied over head $28,400

2. Adjusting Entry

Date Account Title Debit Credit

Dec Cost of goods $28,400 -

-31 sold

Factory - $28,400

Overhead