Question

Southern Rim Parts estimates its manufacturing overhead to be $418,500 and its direct labor costs to be $930,000 for year 1. The first three jobs that Southern Rim worked on had actual direct labor costs of $52,000 for Job 301, $77,000 for Job 302, and $110,000 for Job 303. For the year, actual manufacturing overhead was $464,000 and total direct labor cost was $847,000. Manufacturing overhead is applied to jobs on the basis of direct labor costs using predetermined rates.

Overhead applied in each of the inventory accounts is as follows:

Work-in-process inventory	$	38,115
Finished goods inventory		114,345
Cost of goods sold		228,690

Required:

Prepare an entry to prorate the under- or overapplied overhead.

Record the allocation of over- or underapplied overhead

Answer 1

Predetermined overhead rate = Estimated overheads/Estimated direct labor costs

= $418,500/$930,000

= $0.45 per direct labor dollar

Overhead applied = Actual direct labor costs x  Predetermined overhead rate

= $847,000 x 0.45

= $381,150

Under applied overhead = Actual overhead - Overhead applied

= $464,000 - $381,150

= $82,850

Under applied overhead of $82,850 will be appropriated among Work-in-process inventory, Finished goods inventory and Cost of goods sold in the proportion to overhead applied to them.

Allocation of under applied overhead

	Overhead applied	Proportion of applied overhead	Allocation of under applied overhead
Work-in-process inventory	38,115	38,115/381,150 = 10%	82,850 x 10% = 8,285
Finished goods inventory	114,345	114,345/381,150 = 30%	82,850 x 30% = 24,855
Cost of goods sold	228,690	228,690/381,150 = 60%	82,850 x 60% = 49,710
	$381,150		$82,850

Journal

	Work-in-process inventory	8,285
	Finished goods inventory	24,855
	Cost of goods sold	49,710
	Manufacturing overhead		82,850