Question

Basic Construction Company won a bid to build a gym between January and March 2020. The actual manufacturing overhead for the completed construction was $128,610. On December, 2019, before the start of the construction, the company decided to set an annual overhead rate of $875,000 for all jobs during 2020, to be absorbed by direct labor hours. The actual direct labor hours used for this job was 49,000, and the direct machine hours used was 12,700. The annual direct labor hours estimated for 2020 by the company was 350,000 DLH. Provided there is over or under absorbed overhead, considered not significant, prepare the journal entry to close the manufacturing overhead account, at the end of the contract.

Answer 1

Actual manufacturing overhead = $128,610

Estimated manufacturing overhead = $875,000

Actual direct labor hours = 49,000

Estimated direct labor hours = 350,000

Predetermined overhead rate = Estimated manufacturing overhead/Estimated direct labor hours

= 875,000/350,000

= $2.5 per direct labor hour

Applied manufacturing overhead = Actual direct labor hours x Predetermined overhead rate

= 49,000 x 2.5

= $122,500

Underapplied manufacturing overhead = Actual manufacturing overhead - Applied manufacturing overhead

= 128,610 - 122,500

= $6,110

Journal

Account Title and Explanation	Debit	Credit
Cost goods sold	6,110
Manufacturing overhead		6,110
(To close Underapplied manufacturing overhead)