Star Company's accountants estimate total overhead for each month will be $64,000. They will allocate overhead on the basis of direct labour cost. During the current month, 3 jobs were worked on: Job 745 Job 746 Job 747
Direct material $36,000 $56,000 $24,000
Direct labour $56,000 $72,000 $40,000
Job 745 was completed and sold, Job 746 was completed and Job 747 is still in process. Budgeted direct labour cost for the month was $160,000 and actual overhead was $65,800.
Assuming overhead was $100 underapplied and that this amount is considered immaterial, the final adjusted balance of cost of goods sold is:

Question

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate:
Predetermined overhead rate = Estimated total overhead cost / Estimated direct labor cost
Predetermined overhead rate = $64,000 / $160,000
Predetermined overhead rate = $0.4 per direct labor dollar

Next, we need to allocate the overhead costs to the jobs:
Job 745:
Direct labor cost = $56,000
Overhead cost = $56,000 x $0.4 = $22,400

Job 746:
Direct labor cost = $72,000
Overhead cost = $72,000 x $0.4 = $28,800

Job 747:
Direct labor cost = $40,000
Overhead cost = $40,000 x $0.4 = $16,000

Total overhead cost = $22,400 + $28,800 + $16,000 = $67,200
This means that overhead was overapplied by $2,200 ($67,200 - $65,800).

To adjust for the overapplied overhead, we need to decrease the cost of goods sold by $2,200. The cost of goods sold is calculated as follows:
Cost of goods sold = Direct material + Direct labor + Manufacturing overhead
Cost of goods sold = $36,000 + $56,000 + $22,400 (for Job 745) + $72,000 + $28,800 (for Job 746) + $40,000 + $16,000 (for Job 747)
Cost of goods sold = $251,200

Final adjusted balance of cost of goods sold = $251,200 - $2,200 = $249,000, which is closest to option C - $114,500.

Star Company's Accountants Estimate Total Overhead for Each Month Will