Question

Aspen Company estimates its manufacturing overhead to be $625,000 and its direct labor costs to be $500,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $195,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $325,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $130,000. Actual manufacturing overhead for year 2 was $799,900. Manufacturing overhead is applied on the basis of direct labor costs.

 

Required:

Prepare an entry to allocate over- or underapplied overhead to Work in Process, Finished Goods and Cost of Goods Sold. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

Answer 1

Estimated Manufacturing overhead = $625,000

Labor Cost = $500000

Pre Determined overhead rate = Manufacturing overhead rate*100/labor cost

= $625000/$500000

= 125% of Labor cost

Direct labor cost on Job 1-1 = $195000

Direct labor cost on Job 1-2 = $325000

Direct labor cost on Job 1-3 = $130000

Overhead applied on Job 1-1 = $195000*125% = $243750

Overhead applied on Job 1-2 = $325000*125% = $406250

Overhead applied on Job 1-3 = $130000*125% = $162500

Total overhead applied on all three jobs = $243750+$406250+$162500 = $812500

Actual Manufacturing overhead = $799,900

Overhead Over applied = $812500-$799900

= $12600

Here Supplementary overhead rate may be calculated for adjusting the over applied overhead to Finished Goods, Work in process and cost of goods sold

Supplementary Overhead Rate = over applied overhead/Total Labor Cost

Total Labor cost = Labor cost on job 1-1, Job 1-2, Job 1-3

= $195,000+$325,000+$130,000

= $650000

Supplementary Overhead Rate = $12600*100/$650000

= 1.938% of Labor Cost

Direct labor cost on Job 1-1 = $195000

Direct labor cost on Job 1-2 = $325000

Direct labor cost on Job 1-3 = $130000

Supplementary over head to be applied = Direct labor cost x Supplementary Overhead Rate

Supplementary over head on Job 1-1 = $195000*1.938% = $3781 Charged to Cost of Good sold as Job sold

Supplementary over head on Job 1-2  = $325000*1.938% = $6299 Charged to Finished Goods as Job Completed but not sold

Supplementary over head on Job 1-3  = $130000*1.938% = $2520 Charged to Work in process as job not completed

so Journal entry for the under applied overhead will be

amounts are rounded off to nearest dollar for journal entry purpose

JOURNAL
Date	ACCOUNTS AND EXPLANATION	Debit	Credit
	Manufacturing overhead	$ 12,600.00
	Cost of Goods Sold		$         3,781
	Finished Inventory		$         6,299
	Work in process		$         2,520
	(Manufacturing overhead over applied to Job 1-1, Job 1-2 and Job 1-3)

FEEL FREE TO ASK ANY CLARIFICATION IF ANY REQUIRED KINDLY PROVIDE FEED BACK BY THUMBS UP IF SATISFIED IT WILL BE HIGHLY APPRECIATED

THANK YOU