In December 2016, Learer Company’s manager estimated next year’s total direct labor cost assuming 50 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 | $ | 319,200 | |
| Factory supervision | | 240,000 | |
| Rent on factory building | | 140,000 | |
| Factory utilities | | 88,000 | |
| Factory insurance expired | | 68,000 | |
| Depreciation—Factory equipment | | 480,000 | |
| Repairs expense—Factory equipment | | 60,000 | |
| Factory supplies used | | 68,800 | |
| Miscellaneous production costs | | 36,000 | |
| Total estimated overhead costs | $ | 1,500,000 | |
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At the end of 2017, records show the company incurred $1,520,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $604,000; Job 202, $563,000; Job 203, $298,000; Job 204, $716,000; and Job 205, $314,000. In addition, Job 206 is in process at the end of 2017 and had been charged $17,000 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.
Determine the predetermined overhead rate for 2017.
Estimated direct labor cost
$2,250,000 = (45 × 2,000 × $25)
Determine the total overhead cost applied to each of the six jobs during 2017.
Overhead cost applied
Direct Labor (1.b) * Predetermine overhead rate (1.a)
example: (Job No. 201) 604,000 * 0.6 = 362,400
Determine the over- or underapplied overhead at year-end 2017.
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.
