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17 July, 15:31

A company allocates overhead at a rate of 160% of direct labor cost. Actual overhead cost for the current period is $1,020,000, and direct labor cost is $525,000.

a. Determine whether there is over - or underapplied overhead using the T-account.

b. Prepare the entry to close over - or underapplied overhead to cost of goods sold.

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  1. 17 July, 15:47
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    (A) $180,000 (B) A journal entry was prepared for over - or under applied overhead to cost of goods sold.

    Explanation:

    Solution

    Now,

    Let us recall from the statement from the example as follows:

    A company gives an overhead at = 1 60% rate

    The actual overhead cost for the present period is = 1020,000

    Direct cost of labor = $525,000

    Then,

    (a) For the under applied overhead using T account we have the following:

    The direct labor cost overhead = 525,000 * 160% (allocated overhead)

    =$ 840,000

    Thus

    The Under applied overhead becomes,

    Under applied overhead = The actual overhead - applied overhead

    In other words we deduct the actual overhead for applied overhead

    =$1020,000 - $840,000 = $180,000

    (B) A Journal entry is carried out for the close over or under applied overhead.

    Date Particulars Debit Credit

    Cost of goods sold A/c $180,000

    Manufacturing overheads $180,000
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