In December 2016, Custom Mfg. established its predetermined overhead rate for jobs produced during 2017 by using the following cost predictions: overhead costs, $1,740,000, and direct materials costs, $600,000. At year-end 2017, the company’s records show that actual overhead costs for the year are $1,497,400. Actual direct material cost had been assigned to jobs as follows.
Jobs completed and sold $380,000
Jobs in finished goods inventory 74,000
Jobs in work in process inventory 59,000
Total actual direct materials cost $513,000
1. Determine the pre-determined overhead rate for 2017.
2. Enter the overhead costs incurred and the amounts applied during the year using the pre-determined overhead rate and determine whether overhead is overapplied or underapplied.
3. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

1. The pre-determined overhead rate is 290% of direct material cost

2. The overhead is underapplied for $9,700

3. The adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold would be the following:

31 Dec                         Debit     Credit

Cost of goods sold     $9,700

Factory overhead                        $9,700

Explanation:

1. In order to calculate the pre-determined overhead rate for 2017 we have to calculate the following formula:

pre-determined overhead rate=Estimated overhead costs/Estimated direct material costs

pre-determined overhead rate=$1,740,000/$600,000

pre-determined overhead rate=290%

The pre-determined overhead rate is 290% of direct material cost

2. overhead underapplied= $1,497,400-(290%*$513,000)

overhead underapplied=$1,497,400-$1,487,700

overhead underapplied=$9,700

The overhead is underapplied for $9,700

3. The adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold would be the following:

To record allocation of underapplied overhead to cost of goods sold

31 Dec                         Debit     Credit

Cost of goods sold     $9,700

Factory overhead                        $9,700

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