Solve The bolded text (question) Below In a Memorandum Format.

FOR CITATION USE ONLY GAAP CODIFICATION DATABASE

KTR lost two full months of production during 2020 to a state-mandated closure due to COVID.  Initially, KTR had budgeted $1.2 million of overhead costs (which were almost entirely fixed costs) and 60,000 hours of direct labor at normal capacity, for an overhead application rate of $20.00 pr labor hour.  At the end of the shutdown, the overhead rate was reappraised to $1.2 million of overhead over 50,000 labor hours (due to the lost months of production), for a rate of $24.00 per labor hour.

$1.2 million of overhead cost and 50,000 labor hours approximated what was actually incurred during 2020, and substantially all overhead was assigned to inventory.  Approximately 12% of the overhead was applied to goods still in inventory at December 31, 2020, while the other 88% was applied to goods that have been sold and are no longer in inventory at December 31, 2020 (and is now in cost of goods sold).

Your manager is concerned about the appropriateness of resetting the allocation rate, since at the original rate, only $1.0 million of overhead ($20.00 x 50,000 hours) would have been allocated to goods produced, and the other $200,000 would have been unallocated.  She has asked you to answer the following:

       What was the appropriate overhead cost to include in inventory?  $1.2 million or $1.0 million (or something else)?

       Prepare any journal entry necessary to correct the overhead cost in inventory.  If no journal entry is necessary, state why it is not.

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