A company allocates overhead at a rate of 160% of direct labor cost. Actual overhead cost for the current period is $1,020,000, and direct labor cost is $525,000.

a. Determine whether there is over - or underapplied overhead using the T-account.

b. Prepare the entry to close over - or underapplied overhead to cost of goods sold.

(A) $180,000 (B) A journal entry was prepared for over - or under applied overhead to cost of goods sold.

Explanation:

Solution

Now,

Let us recall from the statement from the example as follows:

A company gives an overhead at = 1 60% rate

The actual overhead cost for the present period is = 1020,000

Direct cost of labor = $525,000

Then,

(a) For the under applied overhead using T account we have the following:

The direct labor cost overhead = 525,000 * 160% (allocated overhead)

=$ 840,000

Thus

The Under applied overhead becomes,

Under applied overhead = The actual overhead - applied overhead

In other words we deduct the actual overhead for applied overhead

=$1020,000 - $840,000 = $180,000

(B) A Journal entry is carried out for the close over or under applied overhead.

Date Particulars Debit Credit

Cost of goods sold A/c $180,000

Manufacturing overheads $180,000