Al Ordan Furniture Company manufactures only custom furniture and uses a job order costing system to accumulate costs. Actual direct materials and direct labor costs are accumulated for each job, but a predetermined overhead rate is used to apply manufacturing overhead costs to individual jobs.

Manufacturing overhead is applied on the basis of direct labor hours. In computing a predetermined overhead rate, the controller estimated that manufacturing overhead costs for 2011 would be $100,000 and direct labor hours would be 25,000. The following information is available for the year 2011:

a. Direct materials purchased, $25,000

b. Direct materials used in production, $20,000

c. Wages and salaries paid for the year: direct labor (20,000 hours), $125,000; indirect labor,

$25,000; sales and administrative salaries, $35,000

d. Depreciation on machinery and equipment, $7,500

e. Rent and utilities for building (75% factory), $20,000

f. Miscellaneous manufacturing overhead, $40,000

g. Advertising costs, $15,500

h. Manufacturing overhead is applied to Work-in-Process Inventory.

i. Seventy-five percent of Work-in-Process Inventory was completed and transferred to Finished Goods Inventory.

Required:

1. Compute the predetermined overhead rate at which manufacturing overhead costs will be applied to jobs.

2. Set up T-accounts and post the transactions.

3. Compute the under- or over-applied manufacturing overhead. Prepare a journal entry to close Manufacturing Overhead and transfer the balance to Cost of Goods Sold.