Question

McKenna Collins LLP public accounting firm employs 10 full-time professionals who provide services to clients. All professional labour compensation is traced directly to clients on a per professional labour-hour basis. Any other costs are included in a single indirect-cost pool (same as overhead) and allocated to individual clients according to billable professional labour-hours.

Operating costs and data for the year included the following:

	Estimated	Actual
Overhead (indirect) cost	$1,000,000	$1,200,000
Number of billable professional labour hours	40,000	50,000
Total professional compensation	750,000	750,000

Required:

a. By how much, if any, was the overhead cost underapplied or overapplied?
b. Prepare a summary journal entry to close any underapplied or overapplied overhead cost to a Cost of Services Provided account.

c. Explain qualitatively and quantitatively (in as much detail as possible) the source(s) of any underapplied or overapplied overhead cost.

Answer 1

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McKenna Collins LLP
Answer a
Estimated OH Rate	Amount $	Note
Number of billable professional labor	40,000.00	A
Overhead (indirect) cost	1,000,000.00	B
Estimated OH Rate	25.00	C=B/A
Actual billable professional labor	50,000.00	D
Overhead applied	1,250,000.00	E=C*D
Actual Overhead (indirect) cost	1,200,000.00	F
Overhead over applied	50,000.00	G=E-F
Answer b	Journal Entry
Account	Debit $	Credit $
Overhead (indirect) cost	50,000.00
Cost of Services Provided		50,000.00

Answer c

The source(s) of any under applied or over applied overhead cost may be many:

1. It may be due to improper planning of overhead costs.

2. It may be due to improper planning of service hours to be billed.

3. It may be due to difference in estimation of budgeted usage of costs.

4. It may be due to receipt of bulk discount or allowances in costs.