Question

At the beginning of the year, Learer Company’s manager estimated total direct labor cost assuming 40...

At the beginning of the year, Learer Company’s manager estimated total direct labor cost assuming 40 persons working an average of 3,000 hours each at an average wage rate of $20 per hour. The manager also estimated the following manufacturing overhead costs for the year. Indirect labor $ 316,200 Factory supervision 100,000 Rent on factory building 147,000 Factory utilities 95,000 Factory insurance expired 75,000 Depreciation—Factory equipment 521,000 Repairs expense—Factory equipment 67,000 Factory supplies used 75,800 Miscellaneous production costs 43,000 Total estimated overhead costs $ 1,440,000 At year-end, records show the company incurred $1,568,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $611,000; Job 202, $570,000; Job 203, $305,000; Job 204, $723,000; and Job 205, $321,000. In addition, Job 206 is in process at the end of the year and had been charged $24,000 for direct labor. No jobs were in process at the beginning of the year. The company’s predetermined overhead rate is based on direct labor cost. Required 1-a. Determine the predetermined overhead rate for the year. 1-b. Determine the total overhead cost applied to each of the six jobs during the year. 1-c. Determine the over- or underapplied overhead at the year-end. 2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of the year.

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Answer #1

1.

Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated direct labor cost

Predetermined overhead rate = $1,440,000 / $2,400,000 (40*3,000*$20) *100

Predetermined overhead rate = 60% of direct labor cost

2.

Job Applied manufacturing overhead
201 $366,600 ($611,000*60%)
202 342,000 (570,000*60%)
203 183,000 (305,000*60%)
204 433,800 (723,000*60%)
205 192,600 (321,000*60%)
206 14,400 (24,000*60%)
Total $1,532,400

3.

Over or under applied overhead = Actual overhead - Applied overhead

Over or under applied overhead = $1,568,000 - $1,532,400

Under applied overhead = $35,600

4.

Cost of goods sold $35,600
Manufacturing overhead $35,600
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