Question

In December 2016, Custom Mfg. established its predetermined overhead rate for jobs produced during 2017 by using the following cost predictions: overhead costs, $750,000, and direct materials costs, $625,000. At year-end 2017, the company's records show that actual overhead costs for the year are $830,000. Actual direct material cost had been assigned to jobs as follows.

Jobs completed and sold $513, 750
Jobs in finished goods Inventory 102, 750
Jobs in work in process Inventory 68, 500
Total actual direct materials cost $685,000
1. Determine the predetermined overhead rate for 2017.

2. Enter the overhead costs incurred and the amounts applied during the year using the predetermined overhead rate and determine whether overhead is overapplied or underapplied.

3. Prepare the adjusting entry to allocate any over-or underapplied overhead to Cost of Goods Sold.

Answer 1

Answer:

1.- overhead rate: 1.2 dollars per material cost

2.- applied overhead: 822,000

    underapplied              8,000

3.-

COGS                             8,000 debit

      Factory Overhead              8,000 credit

Explanation:

$\frac{Cost\: Of \:Manufacturing \:Overhead}{Cost \:Driver}= Overhead \:Rate$

the predetermined overhead rate divide the expected cost over a cost driver:

overhead cost:             750,000

cost driver: material cost: 625,000

rate: 750,000/625,000 = 1.2

each dollar of material cost will appliy 1.2 dollars of overhead.

applied overhead:

685,000 x 1.2 =   822,000

actual overhead: 830,000

underapplied           8,000

the applied overhead is lower than the actual cost, we must increase the capitalized cost.

The adjusting entry will increase overhead and COGS.