Question

In December 2016, Infodeo established its predetermined overhead rate for movies produced during 2017 by using the following cost predictions: overhead costs, \(1,680,000, and direct labor costs, \)480,000. At year-end 2017, the company’s records show that actual overhead costs for the year are \(1,652,000. Actual direct labor cost had been assigned to jobs as follows.

Movies completed and released . . . . . . . . . . . . . . . \)425,000

Movies still in production . . . . . . . . . . . . . . . . . . . . . 50,000

Total actual direct labor cost . . . . . . . . . . . . . . . . . . . $475,000

1. Determine the predetermined overhead rate for 2017.

2. Set up a T-account for overhead and enter the overhead costs incurred and the amounts applied to movies during the year using the predetermined overhead rate.

3. Determine whether overhead is overapplied or underapplied (and the amount) during the year.

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

Short answer

All the requirements are answered.

Step-by-step solution

Computation of predetermined overhead rate

$$\begin{gathered} \mathbf{OverheadRate}\mathbf{=}\frac{\mathbf{EstimatedOverheadcosts}}{\mathbf{Estimatestotaldirectlaborcosts}} \\ \mathbf{=}\frac{\mathbf{1}\mathbf{,}\mathbf{680}\mathbf{,}\mathbf{000}}{\mathbf{480}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{350}\mathbf{\%} \end{gathered}$$

Preparation of t-account

Overhead costs
Actual Overhead $1,652,000	$1,662,500 Applied Overhead
	$10,500 Over-Applied Overhead

Determination of overapplied or underapplied overhead

$$\begin{gathered} \mathrm{OverappliedOverhead}=\mathrm{AppliedOverhead}-\mathrm{ActualOverhead} \\ =1,662,500-1,652,000 \\ =\$10,500 \end{gathered}$$

Adjusting entry

Date	Particulars	Debit ($)	Credit ($)
Dec 31	Factory Overhead	10,500
	Cost of goods sold		10,500