Concept explainers
Primera Company produces two products and uses a predetermined
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?
1.
Determine the plantwide predetermined overhead rate and identify the overhead assigned to each products of Company P.
Explanation of Solution
Plantwide predetermined overhead rate: Plantwide overhead rate is the rate a company uses to allocate its manufacturing overhead costs to products and cost centres. Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base which can be direct labor hours, direct labor in dollars, machine hours or direct materials.
Compute plantwide predetermined overhead rate:
Thus, the predetermined overhead rate for Company P is $2 per direct labor hour.
Ascertain the overhead assigned to each product:
Thus, the overhead assigned to product 1 and product 2 are $1,152,000 and $371,200 respectively.
2.
Compute the predetermined departmental overhead rates and ascertain the overhead assigned to each product.
Explanation of Solution
Compute predetermined departmental overhead rate:
Therefore, the predetermined departmental overhead rate of department 1 and department 2 is $0.60 per direct labor hour and $6.00 per machine hour respectively.
Ascertain the overhead assigned to each product:
Thus, the overhead assigned to product 1 and product 2 is $436,800 and $1,168,320 respectively.
3.
Calculate the applied overhead for the year and determine the under-or-overapplied overhead for the Company P.
Explanation of Solution
Applied overhead: The total overhead charged to actual production at any point of time is termed as applied overhead.
Overapplied overhead: The difference between actual and applied overheads is known as overhead variances. If the applied overhead is more than the actual overhead, then the variance is known as overapplied overhead.
Underapplied overhead: The difference between actual and applied overheads is known as overhead variances. If the applied overhead is less than the actual overhead, then the variance is known as underapplied overhead
Compute total applied overhead rate:
Therefore, the total applied overhead is $1,605,120.
Determine the under-or-overapplied overhead:
Since, the applied overhead is less than the actual overhead, the variance of $26,880 is underapplied overhead.
4.
Record the journal entry to dispose the overhead variance by assuming that it is not material in amount and identify the required additional information if the variance is material to make the appropriate journal entry.
Explanation of Solution
Prepare the journal entry to dispose the overhead variance:
Date | Account title and explanation | Debit ($) | Credit ($) |
Cost of goods sold | 26,880 | ||
Overhead control | 26,880 | ||
(To record the entry to dispose of the variance at the end of the year) |
Table (1)
Therefore, if the variance is material, we would need to know the balances of following Accounts
- Work-in-progress account
- Finished goods account
- Cost of goods sold account.
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Chapter 4 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Lansing. Inc., provided the following data for its two producing departments: Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 30,000 units of Form A produced and sold and 50,000 of Form B. Required: 1. Calculate the overhead rates for each department. 2. Using departmental rates, assign overhead to live two products and calculate the overhead cost per unit. How does this compare with the plantwide rate unit cost, using direct labor hours? 3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates, and compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?arrow_forwardA manufacturing company has two service and two production departments. Building Maintenance and Factory Office are the service departments. The production departments are Assembly and Machining. The following data have been estimated for next years operations: The direct charges identified with each of the departments are as follows: The building maintenance department services all departments of the company, and its costs are allocated using floor space occupied, while factory office costs are allocable to Assembly and Machining on the basis of direct labor hours. 1. Distribute the service department costs, using the direct method. 2. Distribute the service department costs, using the sequential distribution method, with the department servicing the greatest number of other departments distributed first.arrow_forwardRockford Company has four departmental accounts: Building Maintenance, General Factory Overhead, Machining, and Assembly. The direct labor hour method is used to apply factory overhead to the jobs being worked on in Machining and Assembly. The company expects each production department to use 30,000 direct labor hours during the year. The estimated overhead rates for the year include the following: During the year, both Machining and Assembly used 28,000 direct labor hours. Factory overhead costs incurred during the year follow: In determining application rates at the beginning of the year, cost allocations were made as follows, using the sequential distribution method: Building Maintenance to: General Factory Overhead, 10%; Machining, 50%; Assembly, 40%. General factory overhead was distributed according to direct labor hours. Required: Determine the under- or overapplied overhead for each production department. (Hint: First you must distribute the service department costs.)arrow_forward
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