Question

Southern Rim Parts estimates its manufacturing overhead to be $436,000 and its direct labor costs to be $1,090,000 for year 1. The first three jobs that Southern Rim worked on had actual direct labor costs of $68,000 for Job 301, $93,000 for Job 302, and $190,000 for Job 303. For the year, actual manufacturing overhead was $384,000 and total direct labor cost was $831,000. Manufacturing overhead is applied to jobs on the basis of direct labor costs using predetermined rates.

Overhead applied in each of the inventory accounts is as follows:

Work-in-process inventory	$	33,240
Finished goods inventory		66,480
Cost of goods sold		232,680

Required:

Prepare an entry to prorate the under- or overapplied overhead.

Answer 1

Solution:

Predetermined overhead rate
Estimated Manufacturing overhead	436000
/Estimated direct labor cost	1090000
Predetermined overhead rate	40%
Underapplied or overapplied overhead
Applied overhead ($831000*40%)	$3,32,400
Actual Overhead	$3,84,000
Under applied Overhead	$51,600

Proportion of variance	Overhead	Proportion
Work in Process Inventory	33240	10.00%
Finished Goods Inventory	66480	20.00%
Cost of Goods sold	232680	70.00%
Total	332400

Account Title	Debit	Credit
Work in Process Inventory (51600*10%)	$5,160
Finished Goods Inventory (51600*20%)	$10,320
Cost of Goods Sold (51600*70%)	$36,120
To Manufacturing Overhead		$51,600