Chapter 19, Problem 4APSA

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-

  $=Totalestimatedoverheadcost/Totalestimatedquantityoftheoverheadallocationbase$

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

1. Predetermined overhead rate
2. Total overhead cost applied to each job
3. Over or under applied overhead

Answer to Problem 4APSA

(a) Predetermined overhead rate

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{Estimateddirectlaborcost}\hfill \\ PredeterminedOverheadrate=\frac{\$1,500,000}{\$2,500,000}\hfill \\ PredeterminedOverheadrate=60\%\hfill \end{array}$

(b) Total overhead cost applied to each job

Job No.	Direct Labor	Applied overhead (60%)
201	604,000	362,400
202	563,000	337,800
203	298,000	178,800
204	716,000	429,600
205	314,000	188,400
206	17,000	10,200
Total	2,512,000	1,507,200

(c) Over or under applied overhead

Particulars	Amount ($)
Actual overhead cost	15,20,000
Less: Applied overhead cost	15,07,200
Under applied overhead	12,800

Explanation of Solution

(a) Predetermined overhead rate

Given, Estimated overhead cost = $1,500,000

  $\begin{array}{l}Directlaborcost=No.ofpersons*No.ofhours*Wagerateperhour\hfill \\ Directlaborcost=50*2,000*\$25\hfill \\ Directlaborcost=\$2,500,000\hfill \end{array}$

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{Estimateddirectlaborcost}\hfill \\ PredeterminedOverheadrate=\frac{\$1,500,000}{\$2,500,000}\hfill \\ PredeterminedOverheadrate=60\%\hfill \end{array}$

(b) Total overhead cost applied to each job

Given,

Direct labor cost-

Job 201- $604,000

Job 202 - $563,000

Job 203 - $298,000

Job 204 - $716,000

Job 205 - $314,000

Job 206 - $17,000

  $\begin{array}{l}Appliedoverhead=Directlabourcost*Predeterminedoverheadrate\hfill \\ Job201=\$604,000*60\%=\$362,400\hfill \\ Job202=\$563,000*60\%=\$337,800\hfill \\ Job203=\$298,000*60\%=\$178,800\hfill \\ Job204=\$716,000*60\%=\$429,600\hfill \\ Job205=\$314,000*60\%=\$188,400\hfill \\ Job206=\$17,000*60\%=\$10,200\hfill \\ Totalappliedoverhead=362,400+337,800+178,800+429,600+188,400+10,200=1,507,200\hfill \end{array}$

(c) Over or under applied overhead

Given,

Actual overhead cost = $1,520,000

Applied overhead cost= $1,507,200 (Calculated above)

  $\begin{array}{l}Underappliedoverhead=Actualoverheadcost-Appliedoverheadcost \hfill \\ Underappliedoverhead=1,520,000–1,507,200\hfill \\ Underappliedoverhead=12,800\hfill \end{array}$

Conclusion:

Thus, the predetermined overhead, applied overhead and under applied overheads are determined.

To determine

Concept Introduction:

Cost of goods sold -

Cost of goods sold can be defined as the total cost assigned to the goods that are sold during a period of time. It is calculated by summing up all the costs incurred starting from purchases till the process of manufacturing. 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 the adjusting entry.

Answer to Problem 4APSA

Adjusting journal entry-

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
Dec.31	Cost of goods sold	12,800
	Factory overhead		12,800
	(To assign under-applied overhead)

Explanation of Solution

Explanation for journal entry-

When overhead is under applied, the jobs are charged with less overhead than the actual and cost of goods sold will be charged with less overhead. Cost of goods is a cost and its balance increases, so it is debited and factory overhead is credited.

Conclusion:

Thus, overhead is under applied by $12,800.