Dream House Builders, Inc. applies overhead by linking it to direct labor. At the start of the current period, management predicts total direct labor costs of $100,000 and total overhead costs of $20,000. On January 31, the direct labor for this job equals $2,700. Required:
Write the journal entry.

Explanation:

To solve this question, we need to calculate the predetermined overhead rate first and this will be:

= Estimated overhead / Direct labor cost

= $20,000 / $100,000

= 20% of cost of direct labor

Then we calculate the factory overhead which will be:

= Direct Labor × Predetermined overhead rate

= $2700 × 20%

= $540

Then, the journal entry will be:

31 Dec:

Debit Work in Process $540

Credit: Factory overhead $540

(To record overhead applied).

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