Question

Exercise 02-15 Factory overhead computed, applied, and adjusted LO P3, P4

At the beginning of the year, Custom Mfg. established its predetermined overhead rate by using the following cost predictions: overhead costs, $210,000, and direct materials costs, $100,000. At year-end, the company’s records show that actual overhead costs for the year are $1,106,600. Actual direct materials cost had been assigned to jobs as follows.

Jobs completed and sold	$	400,000
Jobs in finished goods inventory		76,000
Jobs in work in process inventory		47,000
Total actual direct materials cost	$	523,000

1. Determine the predetermined overhead rate.
2&3. Enter the overhead costs incurred and the amounts applied to jobs 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.

Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

No	Date	General Journal	Debit	Credit
1	Dec 31	Cost of goods sold
		Factory overhead

Answer 1

1) Pre determined OVERHEAD rate = estimated overhead/estimated material

= $210000/$100000 = $2.1

2) manufacturing overhead T Account

Actual overhead	$1106600	applied overhead( note below)	$1098300
		Balance (underapplied)	$8300

Note : appiled overhead = total actual material cost × pre determined OVERHEAD rate

= $523000× $2.1 = $1098300

3) overhead overapplied/underapplied = appiled overhead - actual overhead

= $1098300 - $1106600 = $8300 (underapplied)

4) adjustment entry

Cost of goods sold dr. $8300

Factory OVERHEAD. $8300

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