Question

The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system.
  

	April 30				May 31
Inventories
Raw materials	$	49,500			$	65,000
Work in process		11,500				23,900
Finished goods		69,500				48,600
Activities and information for May
Raw materials purchases (paid with cash)						223,000
Factory payroll (paid with cash)						371,000
Factory overhead
Indirect materials						28,000
Indirect labor						93,000
Other overhead costs						133,000
Sales (received in cash)						1,530,000
Predetermined overhead rate based on direct labor cost						80	%

Determine whether there is over or underapplied overhead.
Prepare the journal entry to allocate (close) overapplied or underapplied overhead to Cost of Goods Sold.

Answer 1

1. Over or under-applied overhead:

Factory overhead applied
Total Factory payroll	$371,000
(Less): Indirect labor	($93,000)
Direct labor	$278,000
x Predtermined overhead rate	80%
= Applied factory overhead	$222,400
Actual Factory overhead
Indirect materials	$28,000
Indirect labor	$93,000
Other overhead costs	$133,000
Total Actual factory overhead	$254,000
Over or Under applied overhead
Actual factory overhead	$254,000
Applied factory overhead	($222,400)
Under-applied overhead	$31,600

2. Journal Entry:

Account title and explanation	Debit	Credit
Cost of goods sold	$31,600
Factory overhead		$31,600
[To record under-applied overhead transferred to cost of goods sold]