Question

Predetermined Overhead Rates, Overhead Variances, Unit Costs

Primera 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:

	Department 1		Department 2
Direct labor hours	640,000		128,000
Machine hours	16,000		192,000
Overhead cost	$384,000		$1,152,000

Actual results reported by department and product during the year are as follows:

	Department 1		Department 2
Direct labor hours	627,200		134,400
Machine hours	17,600		204,800
Overhead cost	$400,000		$1,232,000

	Product 1		Product 2
Direct labor hours
Department 1	480,000		147,200
Department 2	96,000		38,400
Machine hours
Department 1	8,000		9,600
Department 2	24,800		180,000

Required:

1. Compute the plantwide predetermined overhead rate.
$ per direct labor hour

Calculate the overhead assigned to each product.

Product 1	$
Product 2	$

2. Calculate the predetermined departmental overhead rates. If required, round your answers to the nearest cent.

Department 1	$ per direct labor hour
Department 2	$ per machine hour

Calculate the overhead assigned to each product.

Product 1	$
Product 2	$

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.

Answer 1

Requirement 1: Plant wide rate                
plant wide overhead rate: Total overheads / Total labour hours      
Total overheads = 384,000+1152,000 = $1536,000          
Total labour hours = 640,000 + 128,000 = 768,000 labour hours      
Plant wide rate = Total overheads / Total labour hours          
(1536,000 / 768,000 ) = $2 per labour hours      

	Product 1	Product 2
Labour hours
Department 1	480000	147200
Department 2	96000	38400
Total Labour hours	576000	185600
Overheads applied @$2 per hour	1152000	371200

	Overheads applied
Product 1	$1,152,000
Product 2	$371,200

   
              
Req 2: Departmental overhead rate              
Department 1: Total overheads of department / labour horus      
(384000 /640000) = $ 0.60 per   labour hour      
Department 2: Total overheads of department/ Machine hours      
(1152,000 /192000) = $ 6 per machine hour  

	Product 1	Product 2
Labour hours of Dept 1	480000	147200
Machine hours of Dept 2	24800	180000

      

Overheads assigned:
Department 1(@ $ 0.60 per labour hour)	288000	88320	376320
Department 2($6.00 per machine hour)	148800	1080000	1228800
Total overheads assigned	436800	1168320	1605120

	Overheads applied
Product 1	$436,800
Product 2	$1,168,320

                      
  
Req 3: Using departmental rates                
As computed above, The total overheads assigned is $ 1605,120 (i.e. 436800+1168320)

Under-over applied overheads:                  
Overheads applied:           1605120         

Less: Overheads incurred                  
Department 1      400,000                  
Department 2     1232000       1632000          
Under applied overheads       26880      

  
Req 4: Joural entry is as follows:                  
Cost of goods sold Account Dr.          $ 26,880              
      Manufacturing overheads       $26,880