Question

A company applies overhead at a rate of 150% of direct labor cost. Actual overhead cost for the current period is \(950,000, and direct labor cost is \)600,000. Prepare the journal entry to close over- or underapplied overhead to Cost of Goods Sold.

Short answer

Overheads are underapplied by$50,000.

Step-by-step solution

Definition of Underapplied Overheads

Underapplied overhead refers to the situation where the estimated overheads of the business entity are lower than the actual overheads incurred in the business. Such underestimate is adjusted by making journal entries that increase the cost of goods sold.

Journal entry to close-over/underapplied overhead to cost of goods

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	50,000
	Manufacturing overhead		50,000

Working note: Calculation of over/underapplied overhead

Particular	Amount $
Actual overhead cost	950,000
Less: Estimated overhead $\mathbf{(}\mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{150}\mathbf{\%}\mathbf{)}$	($900,000)
Underapplied overhead	$50,000