Question

Stanley Burrell founder of a company named Hammer Time Inc. Hammer Time Inc produces specialty functional novelty hammers in the image of Stanley Burrell himself, aka MC Hammer. The three best-selling/most popular products sold by Hammer Time Inc. are Hammer Head Hammers, Hammer Pants Hammers, and Please Hammer Don't Hurt ‘Em Mini Hammers.

Hammer Time Inc. uses the actual total factory overhead costs from the prior year (corresponding month) to estimate the total factory overhead costs. They do this by taking last year’s actual costs (same month) and increasing them by 8%.

Actual Total Factory Overhead costs October '18 = $3,000,000

For the month of October '19 for the production in the 2 Legit Warehouse

Estimated Machine Hours = 128,000

Hammer Head Hammers = 50,300 machine hours

Hammer Pants Hammers = 41,200 machine hours

Mini Hammers = 27,300 machine hours

Actual Total Factory Overhead costs October '19 = $3,130,560

A. What is the predetermined overhead rate?

B. If the predetermined factory overhead rate was applied to the three products in March what would be the under/over applied factory overhead once the actual factory overhead cost was known?

C. Using the data from how much factory overhead would be applied to Hammer Pants Hammers?

Answer 1

A)

As per the question the budgeted factory overhead cost for oct '19 =108% of the actual factory overhead cost of oct '18 = 108%* $3000000 = $3240000

Estimated machine hours = 128000

• Predetermined Overhead Rate = Budgeted factory overhead cost/ Estimated activity level = Budgeted factory overhead cost/estimated machine hours = $3240000/128000 hours = $25.3125

B)

Actual factory overhead cost = $3130560

• Total factory overhead absorbed =(Actual machine hours of hammer head hammers* predetermined overhead rate)+(Actual machine hours of hammer pants hammer* predetermined overhead rate)+(Actual machine hours of mini hammers* predetermined overhead rate) =(50300*$25.3125)+(41200*$25.3125)+(27300*$25.3125) = $3007125

• Over/under absorbed overhead = Actual factory overhead cost - Total factory overhead absorbed = $3130560 - $3007125= $123435 Under absorbed

It is under absorbed since the Actual Overhead cost is higher than Total Overhead absorbed

C)

As predetermined Overhead rate we found = $25.3125

And actual machine hours of hammer pants hammer = 41200 hours

• Factory Overhead applied to Hammer pants hammer = Actual machine hours for Hammer pants hammer* Predetermined overhead rate = 41200 hours*$25.3125 = $1042875