To allocate over- or underapplied manufacturing overhead to Work in Process (WIP), Finished Goods (FG), and Cost of Goods Sold (COGS), we first need to determine the applied overhead and compare it to the actual overhead to calculate the over- or underapplied amount.

Here’s a step-by-step approach:

1. Calculate the Predetermined Overhead Rate (POHR):

$\text{POHR} = \frac{\text{Estimated Manufacturing Overhead}}{\text{Estimated Direct Labor Costs}} = \frac{424,580}{816,500} = 0.52 \text{ or } 52\%$

This means 2M applies overhead at 52% of direct labor costs.

2. Calculate the Applied Overhead for Each Job:

• Job 2M-1 (COGS): $\text{Applied Overhead} = 671,000 \times 0.52 = 349,920$

• Job 2M-2 (Finished Goods): $\text{Applied Overhead} = 451,400 \times 0.52 = 234,728$

• Job 2M-3 (WIP): $\text{Applied Overhead} = 97,600 \times 0.52 = 50,752$

Total applied overhead is the sum of applied overhead across all jobs: $349,920 + 234,728 + 50,752 = 635,400$

3. Compare Applied Overhead to Actual Overhead:

• Actual Overhead for Year 2: $669,200
• Applied Overhead: $635,400

$\text{Underapplied Overhead} = \text{Actual Overhead} - \text{Applied Overhead} = 669,200 - 635,400 = 33,800$

This means 2M underapplied $33,800 of overhead.

4. Allocate the Underapplied Overhead:

The underapplied overhead needs to be allocated to Work in Process (WIP), Finished Goods (FG), and Cost of Goods Sold (COGS) based on the proportion of applied overhead for each:

$\text{Total Applied Overhead} = 635,400$

• COGS Allocation: $\frac{349,920}{635,400} \times 33,800 = 18,600$

• Finished Goods Allocation: $\frac{234,728}{635,400} \times 33,800 = 12,484$

• WIP Allocation: $\frac{50,752}{635,400} \times 33,800 = 2,716$

5. Prepare the Journal Entry:

Now we can prepare the journal entry to allocate the underapplied overhead:

Account	Debit	Credit
Cost of Goods Sold (COGS)	$18,600
Finished Goods Inventory (FG)	$12,484
Work in Process (WIP)	$2,716
Manufacturing Overhead		$33,800

This entry adjusts for the underapplied overhead by debiting the relevant inventory and cost accounts and crediting the manufacturing overhead account.

Would you like more details on any part of this explanation?

Additional Questions:

1. How is underapplied overhead different from overapplied overhead?
2. Why do companies allocate overhead rather than directly tracking it for each job?
3. How does the predetermined overhead rate help in job costing?
4. What is the impact of underapplied overhead on financial statements?
5. How are variances like underapplied overhead corrected in subsequent periods?

Tip:

Always compare actual overhead with applied overhead throughout the year to avoid large variances at the end of the year.