Concept explainers
(1)
Predetermined factory overhead rate
Normally,
To Calculate: The predetermined factory overhead rate for each alternative base for M Industries.
(1)
Answer to Problem 19.5CP
The predetermined overhead rate for alternative activity base is prepared as follows:
Direct labor cost:
Machine hours:
Working notes:
Total overhead for (2012 – 2016) is calculated as follows:
Factory Overhead (Actual) | Amount ($) |
2012 | 790,000 |
2013 | 870,000 |
2014 | 935,000 |
2015 | 845,000 |
2016 | 760,000 |
4,200,000 |
Table (1)
Total direct labor cost, (2012 – 2016) is computed as below:
Direct labor cost | Amount ($) |
2012 | 3,885,000 |
2013 | 4,410,000 |
2014 | 4,620,000 |
2015 | 4,200,000 |
2016 | 3,885,000 |
21,000,000 |
Table (2)
Total machine hours, (2012 – 2016) is computed as follows:
Machine hours | Hours |
2012 | 93,000 |
2013 | 104,000 |
2014 | 111,000 |
2015 | 100,400 |
2016 | 91,600 |
500,000 |
Table (3)
Explanation of Solution
The total factory overhead is calculated by totaling all year’s actual overhead incurred in production. There are two activity bases. One is direct labor cost and another is machine hours. The total direct labor cost is determined by adding all year’s direct labor cost incurred. The total machine hours spent is determined by adding all year’s machine hours.
The predetermined overhead rate for direct labor cost is 20% of direct labor cost and predetermined overhead rate for machine hours is$8.40 per machine hour.
(2)
The over- or under applied overhead based on two predetermined overhead rates.
(2)
Answer to Problem 19.5CP
Actual Overhead ($) | Applied Overhead ($) | (Over-) underapplied ($) | ||
(a) | (b) | (c) = (a) – (b) | ||
2016 | Direct Labor cost | 790,000 | 777,000 (1) | 13,000 |
Machine Hours | 790,000 | 781,200 (6) | 8,800 | |
2015 | Direct Labor cost | 870,000 | 882,000 (2) | (12,000) |
Machine Hours | 870,000 | 873,600 (7) | (3,600) | |
2014 | Direct Labor cost | 935,000 | 924,000 (3) | 11,000 |
Machine Hours | 935,000 | 932,400 (8) | 2,600 | |
2013 | Direct Labor cost | 845,000 | 840,000 (4) | 5,000 |
Machine Hours | 845,000 | 843,360 (9) | 1,640 | |
2012 | Direct Labor cost | 760,000 | 777,000 (5) | (17,000) |
Machine Hours | 760,000 | 769,440 (10) | (9,440) |
Table (4)
Working note:
The applied overhead for direct labor activity base is calculated as follows:
The applied overhead for machine hour’s activity base is calculated as follows:
Explanation of Solution
When actual overhead incurred is less than applied overhead, the overhead is said to be overapplied. Alternatively, when actual overhead incurred is greater than applied overhead, the overhead is said to be under applied.
(3)
To Discuss: In applying the best predetermined overhead rate as computed.
(3)
Explanation of Solution
The best predetermined overhead rate is machine hours. The total overhead applied is based on both machine hours and direct labor cost. The over- or underapplied overhead ranges from $9,440 (Overapplied) to $8,800 (Underapplied) when the rates are based on machine hours. The over- or underapplied overhead ranges from $17,000 (Overapplied) to $13,000 (Underapplied) when the rates are based on machine hours.
When comparing both, we could see less fluctuation in under or over applied overhead based on predetermined overhead rate based on machine hours in the year by year basis.
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Chapter 19 Solutions
EBK ACCOUNTING
- PREDETERMINED FACTORY OVERHEAD RATE Marston Enterprises calculates a predetermined factory overhead rate so that factory overhead may be applied to production during the month. It calculates the overhead using three different methods and then decides which one to use. Total estimated factory overhead costs are 600,000. Total estimated direct labor hours are 30,000. Total estimated direct labor costs are 1,200,000. Total machine hours are estimated to be 200,000. Calculate the predetermined overhead application rates based on (1) direct labor hours, (2) direct labor costs, and (3) machine hours.arrow_forwardJOB ORDER COSTING WITH UNDER- AND OVERAPPLIED FACTORY OVERHEAD M Evans Sons manufactures parts for radios. For each job order, it maintains ledger sheets on which it records direct labor, direct materials, and factory overhead applied. The factory overhead control account contains postings of actual overhead costs. At the end of the month, the under- or overapplied factory overhead is charged to the cost of goods sold account. Factory overhead is applied on the basis of direct labor hours. For Job Nos. 101, 102, 103, and 104, direct labor hours are 12,000, 10,000, 11,000, and 18,000, respectively. The overhead application rate is 1.20/direct labor hour (a) Purchased raw materials on account, 50,000. (b) Issued direct materials: (c) Issued indirect materials to production, 8,000. (d) Incurred direct labor costs: (e) Charged indirect labor to production, 15,000. (f) Paid electricity bill, taxes, and repair fees for the factory and charged to production, 8,000. (g) Depreciation expense on factory equipment, 30,000. (h) Applied factory overhead to Job Nos. 101-104 using the predetermined factory overhead rare (see above). (i) Finished Job Nos. 101-103 and transferred to the finished goods inventory account as products N, O, and P. (j) Sold products N and O for 50,000 and 45,400, respectively. (k) Transferred under- or overapplied factory overhead balance to the cost of goods sold account. REQUIRED 1. Prepare general journal entries to record transactions (a) through (k). Make compound entries for (b), (d), and (h), with separate debits for each job. 2. Post the entries to the work in process and finished goods T accounts only and determine the ending balances in these accounts. 3. Compute the balance in the job cost ledger and verify that this balance agrees with that in the work in process control account.arrow_forwardClassify each of the following items of factory overhead as either a fixed or a variable cost. (Include any costs that you consider to be semivariable within the variable category. Remember that variable costs change in total as the volume of production changes.) Indirect labor Indirect materials Insurance on building Overtime premium pay Depreciation of building (straight-line method) Polishing compounds Depreciation of machinery (units-of-production method) Employer’s payroll taxes Property taxes Machine lubricants Employees’ hospital insurance (paid by employer) Labor for machine repairs Vacation pay Janitor’s wages Rent Small tools Plant manager’s salary Factory electricity Product inspector’s wagesarrow_forward
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- Job cost sheet Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of 9,450 to carpet the consulting firms newly leased office. The estimate was based on the following data: On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10. The related materials requisitions and time tickets are summarized as follows: Instructions 1. Complete that portion of the job cost sheet that would be prepared when the estimate is given to the customer. 2. Record the costs incurred, and prepare a job cost sheet. Comment on the reasons for the variances between actual costs and estimated costs. For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.arrow_forwardPrimera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided: Actual results reported by department and product during the year are as follows: Required: 1. Compute the plantwide predetermined overhead rate and calculate the overhead assigned to each product. 2. Calculate the predetermined departmental overhead rates and calculate the overhead assigned to each product. 3. Using departmental rates, compute the applied overhead for the year. What is the under- or overapplied overhead for the firm? 4. Prepare the journal entry that disposes of the overhead variance calculated in Requirement 3, assuming it is not material in amount. What additional information would you need if the variance is material to make the appropriate journal entry?arrow_forwardJOB ORDER COSTING WITH UNDER- AND OVERAPPLIED FACTORY OVERHEAD M. Evans Sons manufactures parts for radios. For each job order, it maintains ledger sheets on which it records direct labor, direct materials, and factory overhead applied. The factory overhead control account contains postings of actual overhead costs. At the end of the month, the under- or over applied factory overhead is charged to the cost of goods sold account. Factory overhead is applied on the basis of direct labor hours. For Job Nos. 101, 102,103, and 104, direct labor hours are 12, 000, 10,000, 11, 000, and 18,000, respectively. The overhead application rate is 1.20/direct labor hour. (a) Purchased raw materials on account, 50,000. (b) Issued direct materials: (c) Issued indirect materials to production, 8,000. (d) Incurred direct labor costs: (e) Charged indirect labor to production, 15,000. (f) Paid electricity bill, taxes, and repair fees for the factory and charged to production, 8,000. (g) Depreciation expense on factory equipment, 30,000. (h) Applied factory overhead to Job Nos. 101104 using the predetermined factory overhead rate (see above). (i) Finished Job Nos. 101103 and transferred to the finished goods inventory account as products N, O, and P. (j) Sold products N and for 50,000 and 45,400, respectively. (k) Transferred under- or over applied factory overhead balance to the cost of goods sold account. REQUIRED 1. Prepare general journal entries to record transactions (a) through (k). 2. Post the entries to the work in process and finished goods accounts only and determine the ending balances in these accounts. 3. Compute the balance in the job cost ledger and verify that this balance agrees with that in the work in process control account.arrow_forward
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