# Why is calculating the predetermined overhead rate so important?Explain

The decision was made to use a process costing system. The first month of operation went fairly smoothly, and the CFO is ready to prepare her journal entries but asked for your help because she has not done this before for a manufacturing company.

Data for month ending 1/31/200X

Direct labor expended on jobs completed in month 1

\$100,000

Direct material used up

\$500,000

\$2,000,000

Budgeted production volume

4,000 units

Actual production volume

4,500 units

Supplies, indirect labor, maintenance repair costs totaled

\$2,200,000

Beginning work in process inventory

0

Ending work in process inventory

0

Individual Portion:

Using only the data in the chart, prepare the proper journal entries—including a date and notes showing any calculations—to record the following:

Labor
Direct material going into the work in progress (WIP) account
Manufacturing overhead all being credited to accounts payable

Group Portion:

You, the CFO, and the rest of the accounting department now need to write a memo summarizing the data from the first month of using the process costing system operation.

Using only the data above, prepare a 300–400-word memo addressing all of these questions and showing all calculations:

Why is calculating the predetermined overhead rate so important?
Compute the firm’s predetermined overhead rate.
What would it mean if you mistakenly used too high a predetermined rate? What would it mean if you mistakenly used too low a predetermined rate?
Compute the proper amount of overhead to apply.
Compute the over- or under applied overhead.
Prepare the journal entries to record the closing-out of the balance in manufacturing overhead to the appropriate accounts, and show any necessary calculations in the notes of the journal entry

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