In December 2016, Pavelka Company\'s manager estimated next year\'s total direct
ID: 2543886 • Letter: I
Question
In December 2016, Pavelka Company's manager estimated next year's total direct labor cost assuming 50 persons working an average of 2,000 hours each at an average wage rate of $15 per hour. The manager also estimated the following manufacturing overhead costs for 2017. Factory utilities Factory insurance expired 44,000 4,000 Repairs expense-Factory equipment Factory supplies used ....30,000 34,400 18,000 At the end of 2017, records show the company incurred $725,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 625, $354,000; Job 626, $330,000: Job 627 $175,000; Job 628, $420,000; and Job 629, $184,000. In addition, Job 630 is in process at the end of 2017 and had been charged $10,000 for direct labor. No jobs were in process at the end of 2016. The com predetermined overhead rate is based on direct labor cost. pany's
Explanation / Answer
1.
a.predetermined overhead rate = total esitmated overhead costs / total estimated direct labour cost....(since direct labour cost is given as the basis for estimating predetermined rate)
here,
total estimated overhead costs = $750,000...(given)
total estimated direct labour cost = 50 workers * 2000 hours each * $15 per hour
=>50 * 2000 * $15 =>$1,500,000.
now,
predetermined overhead rate = $750,000 / $1,500,000
=>$0.50 per dollar of direct labour cost.
2. application of overhead to each job = direct labour cost * $0.50.
1c. since applied ovehead is greater than actual overhead, we have over application of overhead
=> applied overhead - actual overhead =>$736,500 - 725,000 =>$11,500 overapplied.
2.the following is the entry to allocate overapplied overhead to cost of goods sold:
Job 625 ($354,000 *0.50) $177,000 job 626 ($330,000 * 0.50) $165,000 job 627 ($175,000*0.50) $87,500 job 628 ($420,000*0.50) $210,000 job 629 ($184,000*0.50) $92,000 job 630 ($10,000*0.50) $5,000 total overhead applied $736,500