Question

Exercise 2-15 Factory overhead computed, applied, and adjusted LO P3, P4

In December 2016, Custom Mfg. established its predetermined overhead rate for jobs produced during 2017 by using the following cost predictions: overhead costs, $1,100,000, and direct materials costs, $500,000. At year-end 2017, the company’s records show that actual overhead costs for the year are $1,125,300. Actual direct material cost had been assigned to jobs as follows.

Jobs completed and sold	$	380,000
Jobs in finished goods inventory		75,000
Jobs in work in process inventory		52,000
Total actual direct materials cost	$	507,000

1. Determine the predetermined overhead rate for 2017.
2&3. Enter the overhead costs incurred and the amounts applied during the year using the predetermined overhead rate and determine whether overhead is overapplied or underapplied.
4. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

Answer 1

1. Predetermine overhead rate = 1100000*100/500000 = 220% of material cost

2. Applied overhead = Actual material cost*predetermine overhead rate

= 507000*220%

Applied overhead = 1115400

Under/over applied overhead = Applied overhead-actual overhead

= 1115400-1125300

Under applied overhead = 9900

4) Adjusting entry :

Date	accounts & explanation	debit	credit
	Cost of goods sold	9900
	Manufacturing overhead		9900
	(To record under applied overehad allocate to cost of goods sold)