Question

Actual and Predetermined Overhead Rates

Custom Crate Engines assembles custom designed high-performance engines for classic

American cars. Assume the following events occurred during the month of January:

• Materials costing $8,000 were purchased on account.

• Direct materials costing $6,000 were placed in process.

• A total of 450 direct labor hours was charged to individual jobs at a rate of $20 per hour.

• Overhead costs for the month were as follows:

Depreciation on building and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,425

Indirect labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

Property taxes on automotive shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375

Insurance on building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350

There were no jobs in process on January 1.

• On January 31, only one job (A06) was in process with materials costs of $1,800, direct labor

charges of $1,000 for 50 direct labor hours, and applied overhead.

• The building and equipment were purchased before operations began and the insurance was

prepaid. All other costs will be paid during the following month.

Note: Predetermined overhead rates are used throughout the chapter. An alternative is to accumu-

late actual overhead costs for the period in Manufacturing Overhead, and apply actual costs at the

close of the period to all jobs in process during the period.

REQUIRED

a. Assuming Custom Crate assigned actual monthly overhead costs to jobs on the basis of actual

monthly direct labor hours, prepare an analysis of the activity in Work-in-Process for the

month of January.

b. Assuming Custom Crate uses a predetermined overhead rate of $15 per direct labor hour,

prepare an analysis of Work-in-Process for the month of January. Describe the appropriate

treatment of any overapplied or underapplied overhead for the month of January.

c. Assume that utilities and indirect labor are variable costs with respect to direct labor hours

and that depreciation and property taxes are fixed costs. Predict the actual overhead rates for

months when 250 and 750 direct labor hours are used. Assuming jobs similar to A06 were in

process at the end of each month, determine the costs assigned to these jobs.

d. Why do you suppose predetermined overhead rates are preferred to actual overhead rates?

Answer 1