Question

At the beginning of the year, Infodeo established its predetermined overhead rate for movies produced during the year by using the following cost predictions: overhead costs, $1,872,000,and direct labor costs, $480,000. At year-end, the company’s records show that actual overhead costs for the year are $1,369,300. Actual direct labor cost had been assigned to jobs as follows:
Movies completed and released $300,000
Movies still in production 54,000
Total actual direct labor cost $354,000

Required:
a. Determine the predetermined overhead rate for the year.
b. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

Answer 1

Answer:

Part a.

$3.90 per direct labor cost

Part b.

Debit : Overheads $11,300

Credit : Cost of Sales $11,300

Explanation:

The predetermined overhead rate for the year.

predetermined overhead rate = Budgeted Overheads ÷ Budgeted Activities

therefore,

Predetermined overhead rate = $1,872,000 ÷ $480,000

                                                   = $3.90 per direct labor cost

The adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

Step 1 : Overheads Applied Calculation

Overheads Applied = Predetermined overhead rate x actual labor costs

therefore,

Overheads Applied = $3.90 x $354,000 = $1,380,600

Step 2 : Over or Under Application of Overheads

Actual Overheads = $1,369,300

and

Overheads Applied = $1,380,600

therefore,

Over-applied overheads = $1,380,600 - $1,369,300 = $11,300

Step 3 : Journal entry

Reduce the cost of sales figure by the amount of Over-applied overheads

Debit : Overheads $11,300

Credit : Cost of Sales $11,300