Response to the following problem:
Al Ordan Furniture Company manufactures only custom furniture and uses a job order costing system to accumulate costs. Actual direct materials and direct labor costs are accumulated for each job, but a predetermined overhead rate is used to apply manufacturing overhead costs to individual jobs.
Manufacturing overhead is applied on the basis of direct labor hours. In computing a predetermined overhead rate, the controller estimated that manufacturing overhead costs for 2011 would be $100,000 and direct labor hours would be 25,000. The following information is available for the year 2011:
a. Direct materials purchased, $25,000
b. Direct materials used in production, $20,000
c. Wages and salaries paid for the year: direct labor (20,000 hours), $125,000; indirect labor, $25,000; sales and administrative salaries, $35,000
d. Depreciation on machinery and equipment, $7,500
e. Rent and utilities for building (75% factory), $20,000
f. Miscellaneous manufacturing overhead, $40,000
g. Advertising costs, $15,500
h. Manufacturing overhead is applied to Work-in-Process Inventory.
i. Seventy-five percent of Work-in-Process Inventory was completed and transferred to Finished Goods Inventory.
Required:
1. Compute the predetermined overhead rate at which manufacturing overhead costs will be applied to jobs.
2. Set up T-accounts and post the transactions.
3. Compute the under- or over-applied manufacturing overhead. Prepare a journal entry to close Manufacturing Overhead and transfer the balance to Cost of Goods Sold.