Question

In December 2016, Pavelka Company’s manager estimated next year’s total direct labor cost assuming 50 persons working an average of 2,000 hours each at an average wage rate of \(15 per hour. The manager also estimated the following manufacturing overhead costs for 2017.

Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)159,600

Factory supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000

Rent on factory building . . . . . . . . . . . . . . . . . . . . . . . . . 70,000

Factory utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000

Factory insurance expired . . . . . . . . . . . . . . . . . . . . . . 34,000

Depreciation—Factory equipment . . . . . . . . . . . . . . . . 240,000

Repairs expense—Factory equipment . . . . . . . . . . . . . 30,000

Factory supplies used . . . . . . . . . . . . . . . . . . . . . . . . . . 34,400

Miscellaneous production costs . . . . . . . . . . . . . . . . . . 18,000

Total estimated overhead costs . . . . . . . . . . . . . . . . . . \(750,000

At the end of 2017, records show the company incurred \)725,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 625, \(354,000; Job 626, \)330,000; Job 627, \(175,000; Job 628, \)420,000; and Job 629, \(184,000. In addition, Job 630 is in process at the end of 2017 and had been charged \)10,000 for direct labor. No jobs were in process at the end of 2016. The company’s predetermined overhead rate is based on direct labor cost.

Required

1. Determine the following.

a. Predetermined overhead rate for 2017.

b. Total overhead cost applied to each of the six jobs during 2017.

c. Over- or underapplied overhead at year-end 2017.

2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of year 2017.

Short answer

All the requirements of the question are answered in step 1 to step 4 of the solution.

Step-by-step solution

Computation of predetermined overhead rate

$$\begin{gathered} \mathbf{PredeterminedOverheadRate}\mathbf{=}\frac{\mathbf{EstimatedOverheadcosts}}{\mathbf{Estimateddirectlaborcosts}} \\ \mathbf{=}\frac{\mathbf{750}\mathbf{,}\mathbf{000}}{\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{50}\mathbf{\%} \end{gathered}$$

Computation of total overhead cost applied

Job no.	Direct Labor ($)	Overhead cost applied ($)
201	354,000	177,000
202	330,000	165,000
203	175,000	87,500
204	420,000	210,000
205	184,000	92,000
206	10,000	5,000
Total	1,473,000	736,500

 Step 3 Determination of over or under-applied overhead

Factory Overhead
Actual overhead cost 725,000	736,500 Applied Overhead Cost
	11,500 Overapplied Overhead

Journal Entry

Date	Particulars	Debit ($)	Credit ($)
Dec 31	Factory Overhead	11,500
	Cost of goods sol		11,500