To prepare the journal entry for allocating over- or underapplied manufacturing overhead, we first need to calculate the predetermined overhead rate, the applied overhead, and then determine if the overhead was over- or underapplied.

1. Calculate the Predetermined Overhead Rate (POHR):

The predetermined overhead rate is based on estimated manufacturing overhead and estimated direct labor costs.

$\text{Predetermined Overhead Rate (POHR)} = \frac{\text{Estimated Overhead}}{\text{Estimated Direct Labor Costs}}$

$\text{POHR} = \frac{423,020}{813,500} = 0.520 \text{ or } 52\%$

This means that 52% of the direct labor cost is applied as overhead.

2. Apply Manufacturing Overhead to Each Job:

We now apply the predetermined overhead rate to the actual direct labor costs for each job.

• Job 2M-1 (sold): $\text{Applied Overhead} = 555,500 \times 0.52 = 288,860$

• Job 2M-2 (completed but not sold): $\text{Applied Overhead} = 373,700 \times 0.52 = 194,324$

• Job 2M-3 (work-in-process): $\text{Applied Overhead} = 80,800 \times 0.52 = 41,816$

3. Total Applied Overhead:

$\text{Total Applied Overhead} = 288,860 + 194,324 + 41,816 = 525,000$

4. Determine Over- or Underapplied Overhead:

Now, we compare the actual overhead with the applied overhead to determine if overhead was over- or underapplied.

• Actual Overhead: 558,800
• Applied Overhead: 525,000

$\text{Underapplied Overhead} = 558,800 - 525,000 = 33,800$

The overhead was underapplied by $33,800.

5. Allocate the Underapplied Overhead:

The underapplied overhead should be allocated to Work in Process, Finished Goods, and Cost of Goods Sold based on the proportion of applied overhead.

Proportions:

• Job 2M-1 (Cost of Goods Sold): $\frac{288,860}{525,000} = 0.55$
• Job 2M-2 (Finished Goods): $\frac{194,324}{525,000} = 0.37$
• Job 2M-3 (Work in Process): $\frac{41,816}{525,000} = 0.08$

Allocating the underapplied overhead:

• Cost of Goods Sold (Job 2M-1): $33,800 \times 0.55 = 18,590$
• Finished Goods (Job 2M-2): $33,800 \times 0.37 = 12,506$
• Work in Process (Job 2M-3): $33,800 \times 0.08 = 2,704$

6. Journal Entry for Underapplied Overhead:

Now, we can prepare the journal entry to allocate the underapplied overhead to the accounts.

$\text{Cost of Goods Sold} \quad 18,590 \quad \text{Debit}$ $\text{Finished Goods} \quad 12,506 \quad \text{Debit}$ $\text{Work in Process} \quad 2,704 \quad \text{Debit}$ $\text{Manufacturing Overhead} \quad 33,800 \quad \text{Credit}$

This journal entry records the allocation of the underapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold.

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Do you want more details or have any other questions?

Here are some follow-up questions that expand on this problem:

1. How would the journal entry change if the overhead was overapplied instead?
2. How is the predetermined overhead rate typically determined at the beginning of the year?
3. What is the impact of underapplied overhead on financial statements?
4. How is the actual overhead calculated during the year?
5. How would changes in direct labor costs affect the application of overhead?

Tip: Keeping track of overhead application throughout the year helps in adjusting entries efficiently at year-end to reflect accurate costs.