Don\'t really understand how to do this, please explain The following informatio

Question

Don't really understand how to do this, please explain

The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system April 30 May 31 Inventories Raw materials Work in process Finished goods $50,000 11,600 70,000 S66,000 24,100 49,600 Activities and information for May Raw materials purchases (paid with cash) Factory payroll (paid with cash) Factory overhead 224,000 373,000 Indirect materials Indirect labor Other overhead costs 29,000 94,000 134,000 1,540,000 Sales (received in cash) Predetermined overhead rate based on direct labor cost 75% Determine whether there is over or underapplied overhead Factory Overhead Actual overhead Applied overhead nderapplied overhead

Explanation / Answer

Solution :- Applied factory overhead = 75 % of Direct labor cost.

= 75 % of (373000 - 94000)

= 75 % of 279000

= $ 209250.

Actual factory overhead = Indirect material + Indirect labor + Other overhead costs.

= 29000 + 94000 + 134000

= $ 257000.

Under-applied factory overhead = Actual factory overhead - Applied factory overhead

= 257000 - 209250

= $ 47750.

Conclusion :- Underapplied factory overhead = $ 47750.

Note :- i). Applied factory overheads amounting to $ 209250 is less than the actual factory overheads amounting to $ 257000, Accordingly, Factory overhead is under-applied by $ 47750 (257000 - 209250).

ii). Indirect labor cost is subtracted / deducted from the factory payroll costs to arrive at the direct labor cost for the calculation of applied factory overheads.

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