Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 35

Application of Factory Overhead

Tomek Company uses a job costing system that applies factory overhead on the basis of direct labor-hours. The company’s factory overhead budget for 2010 included the following estimates:

Budgeted total factory overhead	$568,000
Budgeted total direct labor-hours	71,000

At the end of the year, the company shows these results:

Actual factory overhead	$582,250
Actual direct labor-hours	71,500

The following amounts of the year’s applied factory overhead remained in the various manufacturing accounts:

	Applied Factory Overhead
Work-in-process inventory	$139,000
Finished goods inventory	216,840
Cost of goods sold	200,160

Required

1. Compute the firm’s predetermined factory overhead rate for 2010.

2. Calculate the amount of overapplied or underapplied overhead.

3. Prepare a journal entry to transfer the underapplied or overapplied overhead to the Cost of Goods Sold account (do not use proration).

Step 1 of 4

Overapplied overhead is the case when the applied factory overhead cost is greater than the actual factory overhead cost. Underapplied overhead is the case when the applied factory overhead cost is lesser than the actual factory overhead cost.