In December 2016, Custom Mfg. established its predetermined overhead rate for jobs produced during 2017 by using the following cost predictions: overhead costs, $1,740,000, and direct materials costs, $600,000. At year-end 2017, the company's records show that actual overhead costs for the year are $1,497,400. Actual direct material cost had been assigned to jobs as follows.

Jobs completed and sold $380,000

Jobs in finished goods inventory 74,000

Jobs in work in process inventory 59,000

Total actual direct materials cost $513,000

1. Determine the pre-determined overhead rate for 2017.

2. Enter the overhead costs incurred and the amounts applied during the year using the pre-determined overhead rate and determine whether overhead is overapplied or underapplied.

3. Prepare the adjusting entry to allocate any over - or underapplied overhead to Cost of Goods Sold.

1. The pre-determined overhead rate is 290% of direct material cost

2. The overhead is underapplied for $9,700

3. The adjusting entry to allocate any over - or underapplied overhead to Cost of Goods Sold would be the following:

31 Dec Debit Credit

Cost of goods sold $9,700

Factory overhead $9,700

Explanation:

1. In order to calculate the pre-determined overhead rate for 2017 we have to calculate the following formula:

pre-determined overhead rate=Estimated overhead costs/Estimated direct material costs

pre-determined overhead rate=$1,740,000/$600,000

pre-determined overhead rate=290%

The pre-determined overhead rate is 290% of direct material cost

2. overhead underapplied = $1,497,400 - (290%*$513,000)

overhead underapplied=$1,497,400-$1,487,700

overhead underapplied=$9,700

The overhead is underapplied for $9,700

3. The adjusting entry to allocate any over - or underapplied overhead to Cost of Goods Sold would be the following:

To record allocation of underapplied overhead to cost of goods sold

31 Dec Debit Credit

Cost of goods sold $9,700

Factory overhead $9,700