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PROBLEM 2-21B Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead (LO1, LO7)
(2) Underapplied: $68,600

Adriana Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

|Computer-hours |82,000 |
|Fixed manufacturing overhead cost |$1,278,000 |
|Variable manufacturing overhead per computer-hour |$3.40 |

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

|Computer-hours |60,000 |
|Manufacturing overhead cost |$1,208,000 |
|Inventories at year-end: | |
| Raw materials |$420,000 |
| Work in process |$120,000 |
| Finished goods |$1,030,000 |
|Cost of goods sold |$2,770,000 |

1. Compute the company’s predetermined overhead rate for the year.
2. Compute the underapplied or overapplied overhead for the year.
3. Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold. Prepare the appropriate entry. Will…...

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