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.

DateParticulars                       Debit              Credit

               Cost of goods sold A/c$180,000

               Manufacturing overheads              $180,000