Question

At the beginning of the year, Custom Mfg. established its predetermined overhead rate by using the following cost predictions: overhead costs, $960,000, and direct materials costs, $400,000. At year-end, the company’s records show that actual overhead costs for the year are $1,249,900. Actual direct materials cost had been assigned to jobs as follows.

Jobs completed and sold	$	390,000
Jobs in finished goods inventory		71,000
Jobs in work in process inventory		56,000
Total actual direct materials cost	$	517,000

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.

Answer 1

1)
Budgeted overheads costs (a)	$960,000
Budgeted direct materials costs (b)	$400,000
Predetermined Overhead Rate (a/b*100)	240%
2&3)
Actual direct materials costs (a)	$517,000
Predetermined Overhead Rate (b)	240%
Applied Overheads (a*b)	$1,240,800
Actual Overheads	$1,249,900
When applied overheads are less than the actual overheads then it is called Underapplied Overheads so the Underapplied overheads are $9,100 ($1,249,900 - $1,240,800).

4) Adjusting Entry:
Date	Account Titles and Explanation	Debit	Credit
	Cost of Goods Sold	$9,100
	Manufacturing overheads		$9,100
	(To record the under applied overheads)