Chapter 19, Problem 16E

To determine

Concept Introduction:

Predetermined overhead rate- Predetermined overhead rate is the rate on which company allocates the indirect costs to manufacturing overhead account.

Predetermined overhead allocation rate is calculated as follows-

  $=Totalestimatedoverheadcost/Totalestimatedquantityoftheoverheadallocationbase$

To determine Predetermined overhead rate

Answer to Problem 16E

Predetermined overhead rate

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{EstimatedDirectlaborcost}\hfill \\ PredeterminedOverheadrate=\frac{\$1,680,000}{\$480,000}\hfill \\ PredeterminedOverheadrate=350\%\hfill \end{array}$

Explanation of Solution

Predetermined overhead rate Given,

• Estimated overhead cost = $1,680,000
• Estimated direct labor cost = $480,000

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{EstimatedDirectlaborcost}\hfill \\ PredeterminedOverheadrate=\frac{\$1,680,000}{\$480,000}\hfill \\ PredeterminedOverheadrate=350\%\hfill \end{array}$

Conclusion:

Thus, the predetermined overhead determined is 350%.

To determine

Concept Introduction:

T-Account

T-Account is most common type of account. It is the simplest account which makes study of accounting very simple.

This accounts resembles with the English letter 'T'.

T-account has three parts-

• The title
• The debit which is on the left side
• The credit which is on the right side
T-Accounts are useful tools for accountants as it helps them to analyze company accounts in effective way.

To set up T-account and determine the applied overhead cost.

Answer to Problem 16E

Applied overhead cost is calculated as follows-

  $\begin{array}{l}Appliedoverheadcost=Actualdirectlaborcost*Predeterminedoverheadrate\hfill \\ Appliedoverheadcost=\$475,000*350\%\hfill \\ Appliedoverheadcost=\$1,662,500\hfill \end{array}$

T-Account for factory overhead

Factory Overhead
Particulars	Amount ($)	Particulars	Amount ($)
Actual overhead	1,652,000	Applied overhead	1,662,500
Factory overhead (overapplied)	10,500
Total	1,662,500	Total	1,662,500

Explanation of Solution

Applied Overhead cost-

Given,

• Direct labor cost = $475,000
• Predetermined overhead rate = 350% (calculated in part1)

  $\begin{array}{l}Appliedoverheadcost=Actualdirectlaborcost*Predeterminedoverheadrate\hfill \\ Appliedoverheadcost=\$475,000*350\%\hfill \\ Appliedoverheadcost=\$1,662,500\hfill \end{array}$

T-account

Given,

• Actual overhead = $1,652,000
• Applied Overhead = $1,662,500 (Calculated above)

  $\begin{array}{l}Factoryoverhead\left(overapplied\right)=Appliedoverhead-Actualoverhead\hfill \\ Factoryoverhead\left(overapplied\right)=\$1,662,500-\$1,652,000\hfill \\ Factoryoverhead\left(overapplied\right)=\$10,500\hfill \end{array}$

Conclusion:

Thus, applied overhead cost is calculated and T-account is prepared.

To determine

Concept Introduction:

Under or Over applied overhead-

Under or Over applied overhead- It is the difference between the actual and applied overhead.

If the actual overhead incurred is more than the overhead applied during a particular period, then it is a case of under-applied of overhead cost.

If the actual overhead incurred is less than the overhead applied during a particular period, then it is a case of over-applied of overhead cost.

To determine the overapplied or underapplied overhead.

Answer to Problem 16E

Overapplied overhead is calculated as follows-

  $\begin{array}{l}Overappliedoverhead=Appliedoverhead-Actualoverhead\hfill \\ Overappliedoverhead=\$1,662,500-\$1,652,000\hfill \\ Overappliedoverhead=\$10,500\hfill \end{array}$

Explanation of Solution

Given,

• Actual overhead = $1,652,000
• Applied Overhead = $1662,500 (Calculated above)

  $\begin{array}{l}Overappliedoverhead=Appliedoverhead-Actualoverhead\hfill \\ Overappliedoverhead=\$1,662,500-\$1,652,000\hfill \\ Overappliedoverhead=\$10,500\hfill \end{array}$

Since, actual overhead incurred is less than the overhead applied, so overhead is overapplied.

Conclusion:

Thus, overapplied overhead cost calculated is $10,500.

To determine

Concept Introduction:

Adjusting entries-

Adjusting entries are prepared to complete the financial statement of the company and to reflect the accrual method of accounting. Adjusting entries are prepared before issuance of financial statement.

To prepare:

To prepare adjusting entry to allocate underapplied overhead costs.

Answer to Problem 16E

Journal entry-

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
	Factory overhead	10,500
	Cost of goods sold		10,500
	(To assign overapplied overhead costs to Cost of goods sold)

Explanation of Solution

Overhead is overapplied which means applied overhead is more than the actual overhead. Cost of goods sold is a cost and its balance is decreasing so it is credited and Factory overhead is debited.

Conclusion:

Thus, adjusting entry is prepared.