Aspen Company estimates its manufacturing overhead to be $625,000 and its direct

Question

Aspen Company estimates its manufacturing overhead to be $625,000 and its direct labor costs to be $500,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $195,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $325,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $130,000. Actual manufacturing overhead for year 2 was $799,900. Manufacturing overhead is applied on the basis of direct labor costs.

Required:

Prepare an entry to allocate over- or underapplied overhead to Work in Process, Finished Goods and Cost of Goods Sold. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Predetermine overhead rate = Manufacturing overhead*100/Direct labour cost

                                         = 625000*100/500000

Predetermine overhead rate = 125%

Total direct labour cost incurred = (195000+325000+130000) = 650000

Manufacturing overhead applied = (650000*125%) = 8125000

Over applied overhead = Applied overhead-actual overhead

                                = 812500-799900

Over applied overhead = 12600

Prepare an entry to allocate over- or underapplied overhead to Work in Process, Finished Goods and Cost of Goods Sold

date accounts & explanation debit credit Manufacturing overhead a/c 12600         Work in process a/c 2520        Finished goods inventory a/c 6300        Cost of goods sold a/c 3780 (To record allocate over applied overhead)

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