Lavender Company has decided to use a predetermined rate to assign factory overhead to production. The following predictions have been made for 2014:
Total factory overhead costs $150,000
Direct labor hours 40,000 hours
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Direct labor costs $200,000
a. Compute the predetermined factory overhead rate assuming Lavender uses direct labor hours as the activity base.
b. Assume that actual factory overhead was $152,500 and that Lavender applies factory overhead to Work in Process based on direct labor hours. If actual direct labor was 42,000 hours for 2014, was factory overhead overapplied or underapplied? By how much?
c. Lavender Company follows the policy of writing off any under- or overapplied factory overhead balance to Cost of Goods Sold at the end of the year. Make the entry necessary at the end of 2014 to dispose of the factory overhead balance (variance) determined in Part (b).