Question

Test Company produces a product that passes through two departments: Department 1 and Department 2. Test Company determines product cost using a normal cost system. The company applies overhead using departmental overhead rates. Overhead in Department 1 is applied based on machine hours. Overhead in Department 2 is applied based on direct labor hours. The company prepared the following estimates at the beginning of the year.

	Department 1	Department 2	Total
Prime cost	$375,000	$700,000	$1,075,000
Overhead cost	$420,000	$240,000	$660,000
Direct labor hours	16,000	50,000	66,000
Machine hours	100,000	20,000	120,000

During the year, Test Company reported the following actual results.

	Department 1	Department 2	Total
Prime cost	$475,000	$850,000	$1,325,000
Overhead cost	$450,000	$300,000	$750,000
Direct labor hours	20,000	60,000	80,000
Machine hours	125,000	25,000	150,000

Q1. Calculate the predetermined overhead rate Test Company uses to apply overhead in Department 1.

	a.	$6.60 per machine hour
	b.	$3.60 per machine hour
	c.	$26.25 per direct labor hour
	d.	$4.20 per machine hour

Q2.

Calculate the overhead applied to production in Department 1 for the year.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

Example: $12,345

Q3. Calculate the predetermined overhead rate Test Company uses to apply overhead in Department 2.

	a.	$13.20 per direct labor hour
	b.	$4.80 per direct labor hour
	c.	$12.00 per machine hour
	d.	$5.00 per direct labor hour

Q4. Calculate the overhead applied to production in Department 2 for the year.

Q5. Calculate the total overhead variance for the year.

	a.	$87,000 underapplied
	b.	$63,000 underapplied
	c.	$63,000 overapplied
	d.	$87,000 overapplied

Answer 1

1.

Estimated overhead cost = $420,000

Estimated machine hour = 100,000

Predetermined overhead rate = Estimated overhead cost/Estimated machine hour

= 420,000/100,000

= $4.2 per machine hour

Correct option is (d)

2.

overhead applied to production in Department 1 = Actual machine hours x Predetermined overhead rate

= 125,000 x 4.2

= $525,000

3.

Estimated overhead cost = $240,000

Estimated direct labor hour = 50,000

Predetermined overhead rate = Estimated overhead cost/Estimated direct labor hour

= 240,000/50,000

= $4.8 per direct labor hour

Correct option is (b)

4.

overhead applied to production in Department 2 = Actual direct labor hour x Predetermined overhead rate

= 60,000 x 4.8

= $288,000

5.

Total actual overhead incurred = Actual overhead in Department 1 + Actual overhead in Department 2

= 450,000 + 300,000

= $750,000

Total overhead applied = overhead applied to production in Department 1 + overhead applied to production in Department 2

= 525,000 + 288,000

= $813,000

Total overhead variance = Total overhead applied - Total actual overhead incurred

= 813,000 - 750,000

= $63,000 overapplied

Correct option is (c)