Jackson uses a predetermined overhead rate. Overhead for the next twelve months

Question

Jackson uses a predetermined overhead rate. Overhead for the next twelve months is estimated to be $400,000. Jackson applies overhead as a percentage of direct labor cost. Direct labor costs are estimated to be $500,000 for the next year. During the year actual direct labor costs amounted to $520,000 and the actual overhead was as follows: Maintence 20,000 Indirect materials 20,000 Indirect labor 90,000 Factory rent 80,000 Depreciation 110,000 Payroll taxes 80,000 Other 20,000 Total 420,000 Required: (1) Calculate the over/under-applied overhead for the year. (2) Assuming that the over/under-applied overhead is immaterial, give the journal entry to closeout the accounts.

Explanation / Answer

Overhead absorption rate = 400000/500000 = $0.8 per $ direct labor cost Overhead applied = 520000 x 0.8 = $416000 Actual overhead = $420000 Thus, there is under applied of overhead of 420000 - 416000 = $4000 Journal entries: Dr Cost of Goods Sold $4000 Cr Manufacturing overhead $4000

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