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
Actual factory overhead costs for March $1,082,500 $840,833
Actual direct labor hours for March 20,416
Actual machine hours for March 50,833

Required:
a. Determine the factory overhead rate for Factory 1.
b. Determine the factory overhead rate for Factory 2.
c. Journalize the entries to apply factory overhead to production in each factory for March.
d. Determine the balances of the factory overhead accounts for each factory as of March 31,and indicate whether the amounts represent overapplied factory overhead or underapplied factory overhead.

Answer 1

a.

$21.50

b.

$40.80

c.

Work In Process : Factory 1 $ 1, 092,910 (debit)

Work In Process : Factory 2 $832,973 (debit)

Overheads $1,925,883 (credit)

d.

Factory 1 : $10,410 (Over-applied)

Factory 2 : $7,860 (Under-applied)

Step-by-step explanation:

Application of Overheads = Predetermined overhead rate × Actual Activity

Where,

Predetermined overhead rate = Estimated Overheads ÷ Estimated Activity

Factory 1

Overheads are applied on the basis of machine hours

Predetermined overhead rate = $12,900,000 ÷ 600,000

= $21.50

therefore,

Application of Overheads = 50,833 × $21.50

= $ 1, 092,910

Factory 2

Overheads are applied on the basis of direct labor hours

Predetermined overhead rate = $10,200,000 ÷ 250,000

= $40.80

therefore,

Application of Overheads = 20,416 × $40.80

= $832,973

Overhead Account - Factory 1

Debit :

Bank $1,082,500

Over - applied (Balance) $10,410

Total $ 1, 092,910

Credit :

Work In Process $ 1, 092,910

Total $ 1, 092,910

Overhead Account - Factory 2

Debit :

Bank $840,833

Total $840,833

Credit :

Work In Process $832,973

Under-applied (Balance) $7,860

Total $840,833