Chapter 4, Problem 41P

1.

To determine

Determine the predetermined overhead rate for plant-wide factory.

Explanation of Solution

Overhead application rate:

Overhead application rate refers to device that is used by the business to apply to their normal amount of overhead cost to work in process inventory. Overhead application rate is predetermined during the beginning of the year and it is based on the estimated amount.

Determine the predetermined overhead rate.

$\begin{array}{c}\text{Predetermined overhead = }\frac{\text{Budgeted overhead (1)}}{\text{Budgeted direct labor hours (2)}}\\ =\frac{\$487,000}{25,\text{000 hours}}\\ =\$19.48\end{array}$

Working notes:

(1) Calculate the budgeted overhead:

$\begin{array}{c}\text{Budgeted overhead = }\frac{\text{Variable cost of A + Fixed cost of A}}{\text{Variable cost of B + Fixed cost of B}}\\ =\frac{\$150,000+\$94,000}{\$80,000+\$163,000}\\ =\$487,000\end{array}$

(2) Calculate the budgeted direct labor hours:

$\begin{array}{c}\text{Budgeted direct labor hours = Units produced }\times \left(\begin{array}{l}\text{Direct labor hours of A+ }\\ \text{Direct labor hours of B}\end{array}\right)\\ =1,000\times \left(15+10\right)\\ =\text{25,000 hours}\end{array}$

2.

To determine

Determine the overhead rate of plant wide.

Explanation of Solution

Calculate the overhead rate of plant wide.

$\begin{array}{c}\text{Predetermined overhead = }\frac{\text{Budgeted overhead (1)}}{\text{Budgeted machine hours (3)}}\\ =\frac{\$487,000}{20,\text{000 hours}}\\ =\$24.35\text{ machine per hour}\end{array}$

Working notes:

(3) Calculate the budgeted machine hours:

$\begin{array}{c}\text{Budgeted machine hours = Units produced }\times \left(\begin{array}{l}\text{Machine hours of A+ }\\ \text{Machine hours of B}\end{array}\right)\\ =1,000\times \left(5\text{hours}+15\text{hours}\right)\\ =1,000\times 20\text{hours}\\ =\text{20,000 hours}\end{array}$

3.

To determine

Determine the applied factory overhead rate for Department A and Department B under direct labor hours and machine hours.

Explanation of Solution

Determine the applied factory overhead rate for Department A under direct labor hours and machine hours.

$\begin{array}{c}\begin{array}{l}\text{Overhead applied for}\\ \text{ Department A }\end{array}\}\text{=}\left(\begin{array}{l}\text{Direct labor hours }\\ \text{of Department A}\end{array}\right)\times \left(\begin{array}{l}\text{Predetermined }\\ \text{overhead rate }\end{array}\right)\\ =\left(\begin{array}{l}\text{Units produced }\times \\ \text{Direct labor hours}\end{array}\right)\times \$19.48\\ =\left(1,000\times 15\right)\times \$19.48\\ =\$292,200\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Overhead applied for}\\ \text{ Department A }\end{array}\}\text{=}\left(\begin{array}{l}\text{Machine hours }\\ \text{of Department A}\end{array}\right)\times \left(\begin{array}{l}\text{Predetermined }\\ \text{overhead rate }\end{array}\right)\\ =\left(\begin{array}{l}\text{Units produced }\times \\ \text{Machine hours}\end{array}\right)\times \$24.35\\ =\left(1,000\times 5\right)\times \$24.35\\ =\$121,750\end{array}$

Determine the applied factory overhead rate for Department B under direct labor hours and machine hours.

$\begin{array}{c}\begin{array}{l}\text{Overhead applied for}\\ \text{ Department B }\end{array}\}\text{=}\left(\begin{array}{l}\text{Direct labor hours }\\ \text{of Department B}\end{array}\right)\times \left(\begin{array}{l}\text{Predetermined }\\ \text{overhead rate }\end{array}\right)\\ =\left(\begin{array}{l}\text{Units produced }\times \\ \text{Direct labor hours}\end{array}\right)\times \$19.48\\ =\left(1,000\times 10\right)\times \$19.48\\ =\$194,800\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Overhead applied for}\\ \text{ Department B }\end{array}\}\text{=}\left(\begin{array}{l}\text{Machine hours }\\ \text{of Department B}\end{array}\right)\times \left(\begin{array}{l}\text{Predetermined }\\ \text{overhead rate }\end{array}\right)\\ =\left(\begin{array}{l}\text{Units produced }\times \\ \text{Machine hours}\end{array}\right)\times \$24.35\\ =\left(1,000\times 15\right)\times \$24.35\\ =\$365,250\end{array}$

4.

To determine

Determine the type of allocation base that will be used to evaluate the performance of each department manager.

Explanation of Solution

Department A will have overhead more than the estimated if direct labor hours are used in determining the factory overhead and Department B will have overhead less than the estimated if direct labor hours are used in determining the factory overhead. Therefore, when direct labor hours is used in determining overhead rate Department A will be assigned more and Department B less. On the other if machine hours are used in determining overhead rate Department A will be assigned less and Department B more. As a result, the cost driver for each department varies and using single plant-wide overhead rate is not appropriate.

5.

To determine

Determine the predetermined overhead rate and applied overhead for Department A using direct labor hours and for Department B using machine hours.

Explanation of Solution

Determine the predetermined overhead rate for Department A using direct labor hours.

$\begin{array}{c}\text{Predetermined overhead = }\frac{\text{Total cost of Department A }}{\text{Direct labor hours of Department A}}\\ =\frac{\$150,000+\$94,000}{15,\text{000 hours}}\\ =\frac{\$244,000}{15,000\text{ hours}}\\ =\$16.267\end{array}$

Determine applied overhead for Department A using direct labor hours.

$\begin{array}{c}\text{Applied overhead=}\left(\begin{array}{l}\text{ Units produced}\times \text{ Direct labour hours of }\\ \text{Department A}\times \text{Predetermined overhead rate}\end{array}\right)\\ =1,000\times 1\text{5hours}\times \$16.27\\ =\$244,000\end{array}$

Determine the predetermined overhead rate for Department B using machine hours.

$\begin{array}{c}\text{Predetermined overhead = }\frac{\text{Total cost of Department B }}{\text{Machine hours of Department B}}\\ =\frac{\$80,000+\$163,000}{15,\text{000 hours}}\\ =\frac{\$243,000}{15,000\text{ hours}}\\ =\$16.20\end{array}$

Determine the applied overhead for Department B using machine hours.

$\begin{array}{c}\text{Applied overhead=}\left(\begin{array}{l}\text{ Units produced}\times \text{ Machine hours of Department B}\times \\ \text{ Predetermined overhead rate}\end{array}\right)\\ =1,000\times 1\text{5hours}\times \$16.20\\ =\$243,000\end{array}$