Question

1. Zella Co. uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Zella allocates manufacturing overhead costs using direct manufacturing labor costs. Zella provides the following information:

	Budget for 2018	Actual Results for 2018
Direct material costs	$2,000,000	$1,900,000
Direct manufacturing labor hours	1,500	1,480
Manufacturing overhead costs	2,900,000	2,950,000

1. Compute the actual and budgeted manufacturing overhead rates for 2018. (1pt)
2. At the end of 2018, compute the under- or overallocated manufacturing overhead under normal costing. Prepare a journal entry to dispose of this amount. (1pt)

Answer 1

(a) Computation of the actual and budgeted manufacturing overhead rates for 2018:

Particulars		Budgeted	Actual
Manufacturing Overheads Costs	A	$2,900,000	$2,950,000
Direct manufacturing labor hours	B	1,500	1,480
Manufacturing overhead rates	C=A/B	$1,933.33	$1,993.24

(b) Computation of the under- or overallocated manufacturing overhead:

Manufacturing overhead rates	A	$1,933.33
Actual labor hours	B	1,480
Allocated Overhead Costs	C=A*B	$2,861,333.33
Actual Overhead Costs	D	$2,950,000
Overallocated or (under-allocated) manufacturing overhead	E=C-D	-$88,666.67

Therefore, overheads are under-allocated by $ 86,666.67.

Under allocated overheads is “unfavorable” outcome, because not enough jobs were produced to absorb all of the overhead incurred. This might result from below normal levels of output or overspending. In any event, the fact remains that more was spent than allocated. Because the Factory Overhead account is just a clearing account (not a financial statement account), the remaining balance must be transferred out. It is done by (credit) the underapplied amount and charge (debit) Cost of Goods Sold. Therefore Journal Entry will be:

General Journal	Debit	Credit
Cost of Goods Sold	$86,666.67
Manufacturing Overheads		$86,666.67
(Being under allocated overheads adjustment made)