Chapter 19, Problem 15E

To determine

Concept Introduction:

Predetermined overhead rate- Predetermined overhead rate is the rate on which company allocates the indirect costs to manufacturing overhead account.

Predetermined overhead allocation rate is calculated as follows-

  $=Totalestimatedoverheadcost/Totalestimatedquantityoftheoverheadallocationbase$

To determine Predetermined overhead rate

Answer to Problem 15E

Predetermined overhead rate

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{Estimatedmaterialcost}\hfill \\ PredeterminedOverheadrate=\frac{\$750,000}{\$625,000}\hfill \\ PredeterminedOverheadrate=120\%\hfill \end{array}$

Explanation of Solution

Predetermined overhead rate Given,

• Estimated overhead cost = $750,000
• Estimated material cost = $625,000

  $\begin{array}{l}PredeterminedOverheadrate=\frac{Estimatedoverheadcosts}{Estimatedmaterialcost}\hfill \\ PredeterminedOverheadrate=\frac{\$750,000}{\$625,000}\hfill \\ PredeterminedOverheadrate=120\%\hfill \end{array}$

Conclusion:

Thus, the predetermined overhead determined is 120%.

To determine

Concept Introduction:

T-Account

T-Account is most common type of account. It is the simplest account which makes study of accounting very simple.

This accounts resembles with the English letter 'T'.

T-account has three parts-

• The title
• The debit which is on the left side
• The credit which is on the right side

T-Accounts are useful tools for accountants as it helps them to analyze company accounts in effective way.

To set up T-account and determine the applied overhead cost.

Answer to Problem 15E

Applied overhead cost is calculated as follows-

  $\begin{array}{l}Appliedoverheadcost=Actualdirectmaterialcost*Predeterminedoverheadrate\hfill \\ Appliedoverheadcost=\$685,000*120\%\hfill \\ Appliedoverheadcost=\$822,000\hfill \end{array}$

T-Account for factory overhead

Factory Overhead
Particulars	Amount ($)	Particulars	Amount ($)
Actual overhead	830,000	Applied overhead	822,000
		Factory overhead (under applied)	8,000
Total	830,000	Total	830,000

Explanation of Solution

Applied Overhead cost-

Given,

• Direct material cost = $685,000
• Predetermined overhead rate = 120% (calculated in part1)

  $\begin{array}{l}Appliedoverheadcost=Actualdirectmaterialcost*Predeterminedoverheadrate\hfill \\ Appliedoverheadcost=\$685,000*120\%\hfill \\ Appliedoverheadcost=\$822,000\hfill \end{array}$

T-account

Given,

• Actual overhead = $830,000
• Applied Overhead = $822,000 (Calculated above)

  $\begin{array}{l}Factoryoverhead\left(underapplied\right)=Actualoverhead-AppliedOverhead\hfill \\ Factoryoverhead\left(underapplied\right)=\$830,000-\$822,000\hfill \\ Factoryoverhead\left(underapplied\right)=\$8,000\hfill \end{array}$

Conclusion:

Thus, applied overhead cost is calculated and T-account is prepared.

To determine

Concept Introduction:

Under or Over applied overhead-

Under or Over applied overhead- It is the difference between the actual and applied overhead.

If the actual overhead incurred is more than the overhead applied during a particular period, then it is a case of under-applied of overhead cost.

If the actual overhead incurred is less than the overhead applied during a particular period, then it is a case of over-applied of overhead cost.

To determine the overapplied or underapplied overhead.

Answer to Problem 15E

Underapplied overhead is calculated as follows-

  $\begin{array}{l}Underappliedoverhead=Actualoverhead-AppliedOverhead\hfill \\ Underappliedoverhead=\$830,000-\$822,000\hfill \\ Underappliedoverhead=\$8,000\hfill \end{array}$

Explanation of Solution

Given,

• Actual overhead = $830,000
• Applied Overhead = $822,000 (Calculated above)

  $\begin{array}{l}Underappliedoverhead=Actualoverhead-AppliedOverhead\hfill \\ Underappliedoverhead=\$830,000-\$822,000\hfill \\ Underappliedoverhead=\$8,000\hfill \end{array}$

Since, actual overhead incurred is more than the overhead applied, so overhead is underapplied.

Conclusion:

Thus, under applied overhead cost calculated is $8,000.

To determine

Concept Introduction:

Adjusting entries-

Adjusting entries are prepared to complete the financial statement of the company and to reflect the accrual method of accounting. Adjusting entries are prepared before issuance of financial statement.

To prepare:

To prepare adjusting entry to allocate underapplied overhead costs.

Answer to Problem 15E

Journal entry-

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	8,000
	Factory overhead		8,000
	(To assign underapplied overhead costs to Cost of goods sold)

Explanation of Solution

Overhead is underapplied which means applied overhead is less than the actual overhead. Cost of goods sold is a cost and its balance is increasing so it is debited and Factory overhead is credited.

Conclusion:

Thus, adjusting entry is prepared.