Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Question
Chapter 2, Problem 2TIF

(1)

To determine

Ascertain the predetermined factory overhead rate for each alternative base for F Industries.

(1)

Expert Solution
Check Mark

Explanation of Solution

Predetermined factory overhead rate

Normally, factory overhead costs are applied or allocated to cost of job based on predetermined factory overhead rate. The formula to calculate the predetermined factory overhead rate is as follows:

Predetermined factory overhead rate = Estimated total factory overhead costsEstimated activity rate

The predetermined overhead rate for alternative activity base is prepared as follows:

Direct labor cost:

Predetermined overhead rate = Total overhead cost Table (1)Total direct labor cost Table (2)=$4,200,000$21,000,000=20% of direct labor cost

Machine hours:

Predetermined overhead rate = Total overhead cost Table (1)Total machine hours Table (3)=$4,200,000500,000=$8.40 per machine hour

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.

Working notes:

Total overhead for (Year 1 – Year 5) is calculated as follows:

Factory Overhead (Actual)Amount($)
Year 1790,000
Year 2870,000
Year 3935,000
Year 4845,000
Year 5760,000
 4,200,000

Table (1)

Total direct labor cost, (Year 1 – Year 5) is computed as below:

Direct labor costAmount($)
Year 13,885,000
Year 24,410,000
Year 34,620,000
Year 44,200,000
Year 53,885,000
 21,000,000

Table (2)

Total machine hours, (Year 1 – Year 5) is computed as follows:

Machine hoursHours
Year 193,000
Year 2104,000
Year 3111,000
Year 4100,400
Year 591,600
 500,000

Table (3)

Conclusion

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)

To determine

Ascertain the over- or under applied overhead based on two predetermined overhead rates.

(2)

Expert Solution
Check Mark

Explanation of Solution

  Actual Overhead ($)Applied Overhead($)(Over-) underapplied ($)
  (a)(b)(c) = (a) – (b)
Year 5Direct Labor cost790,000777,000(1)13,000
Machine Hours790,000781,200 (6)8,800
    
Year 4Direct Labor cost870,000882,000(2)(12,000)
Machine Hours870,000873,600 (7)(3,600)
    
Year 3Direct Labor cost935,000924,000(3)11,000
Machine Hours935,000932,400 (8)2,600
    
Year 2Direct Labor cost845,000840,000(4)5,000
Machine Hours845,000843,360 (9)1,640
    
Year 1Direct Labor cost760,000777,000(5)(17,000)
Machine Hours760,000769,440 (10)(9,440)

Table (4)

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.

Working note (1):

The applied overhead for direct labor activity base is calculated as follows:

Applied overhead (Year 5)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$3,885,000×20%=$777,000

Working note (2):

Applied overhead (Year 4)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,410,000×20%=$882,000

Working note (3):

Applied overhead (Year 3)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,620,000×20%=$924,000

Working note (4):

Applied overhead (Year 2)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,200,000×20%=$840,000

Working note (5):

Applied overhead (Year 1)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$3,885,000×20%=$777,000

Working note (6):

The applied overhead for machine hour’s activity base is calculated as follows:

Applied overhead (Year 5)=[Machine hours × Predetermined overhead rate based on machine hours]=93,000×$8.40=$781,200

Working note (7):

Applied overhead (Year 4)=[Machine hours × Predetermined overhead rate based on machine hours]=104,000×$8.40=$873,600

Working note (8):

Applied overhead (Year 3)=[Machine hours × Predetermined overhead rate based on machine hours]=111,000×$8.40=$932,400

Working note (9):

Applied overhead (Year 2)=[Machine hours × Predetermined overhead rate based on machine hours]=100,400×$8.40=$843,360

Working note (10):

Applied overhead (Year 1)=[Machine hours × Predetermined overhead rate based on machine hours]=91,600×$8.40=$769,440

(3)

To determine

Suggest in applying the best predetermined overhead rate as computed.

(3)

Expert Solution
Check Mark

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 2 Solutions

Managerial Accounting

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