Auto Renovators2 is a leading classic car restoration company in Australia. The company has been well-known for renovating thousands of classic cars in Australia according to customers’ orders. In February, the company has worked on five jobs, numbered 301 to 305. Direct materials used, direct labour incurred in February were as shown in the following table.
| Order number | Direct material ($) | Direct labour ($) | |||||
| 301 | 1090 | 1610 | |||||
| 302 | 770 | 1410 | |||||
| 303 | 920 | 1010 | |||||
| 304 | 1070 | 1910 | |||||
| 305 | 230 | 610 |
Manufacturing overheads during February included indirect material ($ 1100), indirect labour ($ 2750), rent ($ 2000), depreciation ($ 1300), insurance ($ 250), utilities ($ 800), and other manufacturing costs ($ 400).
At the beginning of the month, management anticipated that overhead cost would be $ 9100 and total direct labour would amount to $ 6500. Overhead is allocated on the basis of direct labour dollars.
Jobs 301 to 303 were finished during the month; Jobs 304 and 305 is still in process. Jobs 301 to 303 were picked up and paid by customers for $ 6100, $ 4800, $ 3700.
Required
1. Determine the company’s predetermined overhead rate.
2. Prepare the journal entries to reflect the following: the incurrence of materials, labour, and actual overhead costs; the allocation of overhead; and the transfer of job costs to finished goods inventory and cost of goods sold (Note: Use summary entries where appropriate by combining individual job data).
3. In your own words, describe the two different approaches to closing overapplied or underapplied overhead at the end of the month. How do you choose an appropriate method? Calculate the amount of overapplied or underapplied overhead to be closed and prepare an appropriate journal entry.
