Question

Kelly Manufacturing established predetermined overhead rate using the cost predictions: overhead costs, $680,000, and direct materials costs, $425,000. At year-end, the company's records show that actual overhead costs for the year are $1,050,000. Actual direct materials costs had been assigned to jobs as follows.

Jobs completed and sold	$207,000
Jobs in finished goods inventory	102,750
Jobs in work in process inventory	195,250
Total actual direct materials cost	$505,000

1. Determine the predetermined overhead rate using predicted direct materials costs. Round your answer to two decimals.

2. What amount is debited to the Factory Overhead account for the current year?

3. What amount is credited to the Factory Overhead account for the current year?

4. Determine the amount by which overhead has been over- or underapplied. Provide the amount of over- or underapplication, and indicate overapplied or underapplied. (Example: 200 underapplied or 500 overapplied.)

5. Provide the adjusting journal entry to correct the over- or underapplied overhead. (In the blank provide your answer in the following format: debit "account name" "amount"; credit "account name" "amount"

Answer 1

Requirement 1:

Predetermined overhead rate = $680,000 ÷ $425,000 = $1.60

Requirement 2:

Debited to factory overhead account = Actual overhead cost = $1,050,000

Requirement 3:

Credited to factory overhead account = Actual direct materials x Predetermined overhead rate = $505,000 x $1.60 = $808,000

Requirement 4:

Over(under) applied = Overhead applied - Actual overhead costs = $808,000 - $1,050,000 = -$242,000 or $242,000 Under applied

Requirement 5:

Adjusting Entry:

Account title and explanation	Debit	Credit
Cost of goods sold	$242,000
Factory overhead		$242,000
[To record under-applied overhead charged to cost of goods sold]