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Factory overhead computed, applied, and adjusted

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Jobs completed and sold . . . . . . . . . . . . . . . . . $420,000
Jobs in finished goods inventory . . . . . . . . . . . 84,000
Jobs in goods in process inventory . . . . . . . . . 56,000
Total actual direct labor cost . . . . . . . . . . . . . $560,000

In December 2010, Perez Company established its predetermined overhead rate for jobs produced during
year 2011, by using the following cost predictions: overhead costs of $600,000, and direct labor costs of $500,000. At year end of 2011, the company's records show that actual overhead costs for the year are $680,000. Actual direct labor cost had been assigned to jobs as follows.
1. Determine the predetermined overhead rate for the year 2011.
2. Set up a T-account for Factory Overhead and enter the overhead costs incurred and the amounts applied to jobs during the year using the predetermined overhead rate.
3. Determine whether overhead is over-applied or under-applied (and the amount) during the year.
4. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.

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Solution Summary

The Solution finds the predetermined overhead rate, and applies it to Perez Company's financials.

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