Question

Young Foundry uses a predetermined overhead allocation rate to allocate overhead to individual jobs, based on the machine hours required. At the beginning of 2018, the company expected to incur the following:

Manufacturing overhead costs	\(840,000
Direct labor cost	1,480,000
Machine hours	70,000 hours

At the end of 2018, the company had actually incurred:

Direct labor cost	\)1,230,000
Depreciation on manufacturing plant and equipment	620,000
Property taxes on plant	35,500
Sales salaries	26,000
Delivery driver’s wages	22,500
Plant janitor’s wages	17,000
Machine hours	60,000 hours

Requirements

4. Prepare the journal entry to adjust for the underallocated or overallocated manufacturing overhead. Does your entry increase or decrease Cost of Goods Sold?

Short answer

Date	Particulars	Debit($)	Credit ($)
	Cost of goods sold	1,000
	Manufacturing overhead		1,000

The cost of goods sold is an expense account and is debited while adjusting the underallocated manufacturing overhead. Hence, the cost of goods sold is increased when the underallocated overhead is adjusted.

Step-by-step solution

Underallocated overhead

The overhead is considered as the underallocated overhead when the actual overhead is more than the allocated overhead during the year.

The underallocated overhead amount

$$\begin{gathered} \mathbf{underallocated}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{=}\mathbf{}\mathbf{actual}\mathbf{}\mathbf{overheard}\mathbf{}\mathbf{-}\mathbf{}\mathbf{allocated}\mathbf{}\mathbf{overhead} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{721}\mathbf{,}\mathbf{000}\mathbf{}\mathbf{-}\mathbf{}\mathbf{\$}\mathbf{720}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000} \end{gathered}$$

The underallocation of manufacturing overhead is recorded in the books by debiting the cost of goods sols and by crediting the manufacturing overhead account.