Question

The predetermined overhead allocation rate for Lemke, Inc., is based on estimated direct labor costs of $250,000 and estimated factory overhead of $550,000. Actual costs incurred were:

Direct materials……………………………..	$250,000
Direct labor…………………………………..	300,000
Indirect materials……………………………	155,000
Indirect labor………………………………..	225,000
Sales commissions………………………….	50,000
Factory depreciation…………………………	170,000
Property taxes, factory……………………...	115,000
Advertising……………………………….....	62,500

(a)    Calculate the predetermined overhead rate and calculate the overhead applied during the year.

(b)   Determine the amount of over- or underapplied overhead and state whether it was under or overapplied. Prepare the journal entry to eliminate the over- or underapplied overhead.  

Answer 1

a) Predetermined overhead rate = Estimated factory overhead*100/ Estimated direct labor cost

                                                    = 550000/250000 = 220%

    Applied overhead = Actual labor hours * predetermined overhead rate = 300000*220% = $ 6,60,000

b) Actual overhead = indirect material + indirect labor + factory depreciation + property taxes, factory

                              = 155000+225000+170000+115000 = $6,65,000

   Underapplied overhead = Actual overhead - Applied overhead = $6,65,000 - $ 6,60,000 = $5,000

Journal entry to eliminate underapplied factory overhead:

Dr. Cost of goods sold $5,000

Cr. Factory overhead $ 5,000

Note : (Advertising and sales commission are not factory overheads.)