In December 2016, Learer Company’s manager estimated next year’s total direct la
ID: 2558874 • Letter: I
Question
In December 2016, Learer Company’s manager estimated next year’s total direct labor cost assuming 45 persons working an average of 2,000 hours each at an average wage rate of $25 per hour. The manager also estimated the following manufacturing overhead costs for 2017.
At the end of 2017, records show the company incurred $1,820,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $610,000; Job 202, $569,000; Job 203, $304,000; Job 204, $722,000; and Job 205, $320,000. In addition, Job 206 is in process at the end of 2017 and had been charged $23,000 for direct labor. No jobs were in process at the end of 2016. The company’s predetermined overhead rate is based on direct labor cost.
Required
1-a. Determine the predetermined overhead rate for 2017.
1-b. Determine the total overhead cost applied to each of the six jobs during 2017.
1-c. Determine the over- or underapplied overhead at year-end 2017.
2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of 2017.
Complete this question by entering your answers in the tabs below.
Determine the over- or underapplied overhead at year-end 2017.
Determine the total overhead cost applied to each of the six jobs during 2017.
Complete this question by entering your answers in the tabs below.
Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of 2017.
Journal entry worksheet
Record the entry to allocate any overapplied or underapplied overhead to Cost of Goods Sold at the end of year 2017.
Note: Enter debits before credits.
Indirect labor $ 325,200 Factory supervision 233,000 Rent on factory building 146,000 Factory utilities 94,000 Factory insurance expired 74,000 Depreciation—Factory equipment 520,000 Repairs expense—Factory equipment 66,000 Factory supplies used 74,800 Miscellaneous production costs 42,000 Total estimated overhead costs $ 1,575,000Explanation / Answer
Solution:
Part 1-a -- Predetermined overhead rate for 2017.
Predetermined overhead rate
Choose Numerator:
/
Choose Denominator:
=
Predetermine overhead rate
Estimated Overhead Costs
/
Estimated Direct Labor Cost (Refer Note 1)
=
Predetermine overhead rate
1575000
/
2250000
=
$0.70 per direct labor dollar or 70% of Direct labor cost
Note 1 --- Estimated Direct Labor Cost
Total Estimated Direct labor hours for the year = 45 person x 2000 hours each = 90,000
Total Estimated Direct labor cost = Estimated Hours 90,000 x $25 per hour = $2,250,000
Part 1-b --- total overhead cost applied to each of the six jobs during 2017
Job No.
Direct Labor
Overhead cost applied
(Direct Labor Cost x 0.70)
201
$610,000
$427,000
202
$569,000
$398,300
203
$304,000
$212,800
204
$722,000
$505,400
205
$320,000
$224,000
206
$23,000
$16,100
Total
$2,548,000
$1,783,600
Part 1-c – the over- or underapplied overhead at year-end 2017
Factory Overhead
Overhead Cost incurred
$1,820,000
$1,783,600
Applied Overhead Cost (Refer Part 1c)
Ending Balance
$36,400
Applied Overhead is less than actual overhead incurred, it means overheads are Under Applied by $36,400 ($1,820,000 - $1,783,600)
Part d -- adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of 2017
Date
General Journal
Debit
Credit
Dec 31
Cost of Goods Sold
$36,400
Factory Overhead or Under Applied Overhead
$36,400
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Predetermined overhead rate
Choose Numerator:
/
Choose Denominator:
=
Predetermine overhead rate
Estimated Overhead Costs
/
Estimated Direct Labor Cost (Refer Note 1)
=
Predetermine overhead rate
1575000
/
2250000
=
$0.70 per direct labor dollar or 70% of Direct labor cost