Question

Clean and Brite manufactures three different models of swimming pool cleaners (AR1, AR2,
and BR1). These are sophisticated computer-controlled, programmed cleaners that scrub and
vacuum the pool's bottom, and steps and provide supplemental filtration of pool water. The
three models differ in their capacity and programmability.
Clean and Brite uses an absorption costing system that absorbs manufacturing overhead to
the three models based on direct labor hours. The single plantwide manufacturing overhead
rate is predetermined before the beginning of the fiscal year using a flexible manufacturing
overhead budget. Variable manufacturing overhead is budgeted to be $3.00 per direct
labor hour, and fixed manufacturing overhead is budgeted to be $1,397,500.   Direct labor
is budgeted at $25 per DLH. The following table summarizes the budgeted and actual
results of operation for the year:
				Models
				AR1	AR2	BR1
Actual number of units produced				5,100	3,900	2,200
Actual DL hours per unit				3.1	4.2	5.9
Budgeted wholesale price				$550	$750	$1,050
Budgeted DL hours per scrubber				3	4	6
Budgeted direct materials				$95	$125	$175
Budgeted production (units)				5,000	4,000	2,000
Budgeted DL cost (@$25 per DL hour)				$75	$100	$150
REQUIRED:
1. Calculate the firmwide overhead rate at the beginning of the year (round to two decimals).
2. A batch of 100 units of model AR2 is produced using 405 direct labor hours. How much
overhead is absorbed by this batch of 100 model AR2s?
3. Actual overhead incurred during the year was $1,520,500. Calculate the amount of over- or
underabsorbed overhead for the year.
4. Clean and Brite writes off any over/underabsorbed to cost of good sold. What is the effect
of writing off the over/underabsorbed overhead calculated in (3) on net income? In other
words, does net income increase or decrease after the writeoff?

Answer 1

1	Pre-determined overhead rate (PDOR)=Estimated manufacturing overhead/Estimated direct labor hours (DLH)
	Estimated direct labor hours:
				AR 1	AR 2	BR 1	Total
	Budgeted production			5000	4000	2000
	*
	Budgeted DL hours per unit			3	4	6
	Bugeted labor hours			15000	16000	12000	43000
	Estimated manufacturing overhead:
					$
	Variable	(3*DLH=3*43000)			129000
	Fixed				1397500
	Total				1526500
	Pre-determined overhead rate=1526500/43000=$ 35.5 per DLH
2	Overhead absorbed=DLH used*Pre-determined overhead rate=35.5*405=$ 14377.5
3	Actual overhead incurred=$ 1520500
	Aborbed overhead=Actual DLH*PDOR
	Actual DLH
				AR 1	AR 2	BR 1	Total
	Actual production			5100	3900	2200
	*
	Actual DL hours per unit			3.1	4.2	5.9
	Bugeted labor hours			15810	16380	12980	45170
	Aborbed overhead=45170*35.5=$ 1603535
	Absorbed overhead is more than actual overhead,Hence, Over-absorption happended
	Overabsorbed overhead=Absorbed overhead-Actual overhead=1603535-1520500=$ 83035
4	Entry would be :
	Manufacturing overhead-Debit			83035
	cost of goods sold-Credit				83035
	Here, cost of goods sold is Credited.Hence,over-absorption will result in decrease in cost of goods sold.Thus, it will result in higher gross profit and it will result in increase in net income.