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.

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	$	1,575,000

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.

	Predetermined overhead rate Choose Numerator: / Choose Denominator: = Predetermine overhead rate / = Predetermine overhead rate / =

Complete this question by entering your answers in the tabs below.

Determine the over- or underapplied overhead at year-end 2017.

	Factory Overhead

Determine the total overhead cost applied to each of the six jobs during 2017.

	Job No. Direct Labor Overhead cost applied 201 $610,000 202 569,000 203 304,000 204 722,000 205 320,000 206 23,000 Total $2,548,000

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.

	Date General Journal Debit Credit Dec 31

Answer 1

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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