At the beginning of the year, Custom Mfg. established its predetermined overhead rate by using the following cost predictions: overhead costs, $840,000, and direct materials costs, $400,000. At year-end, the company’s records show that actual overhead costs for the year are $1,151,500. Actual direct materials cost had been assigned to jobs as follows.

Jobs completed and sold $390,000

Jobs in finished goods inventory 83,000

Jobs in work in process inventory 55,000

Total actual direct materials cost $528,000

Required:

a. Determine the predetermined overhead rate.

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

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

a) Predetermined overhead rate is 210%

b. Overhead is under-applied by $42,700

c. Particulars Debit credit

cost of goods sold $42,700 $42,700

factory overhead

Explanation:

Beginning of the year

Overhead costs = $840,000

Direct materials costs = $400,000

End of the year actual overhead cost = $1,151,500

Jobs completed and sold = $390,000

Jobs in finished goods inventory = $83,000

Jobs in work in process inventory = $55,000

Total actual direct materials cost = $528,000

a. Calculating the predetermined overhead rate = (Overhead : direct labor) * 100

Predetermined overhead rate = ($840,000 : $400,000) * 100

= 210%

b. Factory overhead

Actual overhead = $1,151,500

Applied overhead = $528000 * 210% = $1,108,800

Difference = actual overhead - applied overhead

= $1,151,500 - $1,108,800

= $42,700 Under-applied overhead

c. Adjusting entry to allocate the above under-applied overhead cost of goods sold

Particulars Debit credit

cost of goods sold $42,700 $42,700

factory overhead