Question

In: Accounting

Test Company produces a product that passes through two departments: Department 1 and Department 2. Test...

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

Solutions

Expert Solution

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)


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