Question

The predetermined overhead allocation rate for Newton, Inc., is based on estimated direct labor costs of $400,000 and estimated factory overhead of $800,000. Actual costs incurred were:

Indirect materials……………………………..	$17,000
Indirect labor…………………………………..	13,000
Direct materials……………………………	75,000
Direct labor………………………………..	30,000
Advertising………………………….	50,000
Factory depreciation…………………………	17,000
Factory Property taxes……………………...	12,000
Sales Commissions ……………………………….....	100,500

(a)    Calculate the predetermined overhead rate and calculate the overhead applied during the year.

(b)   Determine the amount of over- or underapplied overhead and state whether it was under or overapplied. Prepare the journal entry to eliminate the over- or underapplied overhead.

Answer 1

a.

Estimated direct labor cost = $400,000

Estimated factory overhead = $800,000

Predetermined overhead = Estimated factory overhead /Estimated direct labor cost

= 800,000/400,000

= 200% of direct labor cost

Actual direct labor cost = $30,000

Applied overhead = Actual direct labor cost x Predetermined overhead

= 30,000 x 200%

= $60,000

Actual overhead = Indirect materials + Indirect labor + Factory depreciation + Factory Property taxes

= 17,000+13,000+17,000+12,000

= $59,000

The overhead applied during the year = $59,000

b.

Over applied overhead = Applied overhead- Actual overhead

= 60,000-59,000

= $1,000

General Journal	Debit	Credit
Factory overhead	$1,000
Cost of goods sold		$1,000
( To eliminate over applied factory overhead)