Question

Dósagerðin hf. divides indirect production costs on the basis of machine hours. The following table shows some information about the operation last year.

Requested:

a) What was the estimated exchange factor for indirect production costs? (budgeted factory overhead rate)

(b) What was the implication of the indirect costs? (over / underapplied overhead)

c) What diary entry had to be made if depreciation / overcharge was written off over the cost of goods sold? (write-off to cost of goods sold approach)

d) What diary entry would have to be made if proportional equalization was applied? (proportion approach)

e) Which method is more correct and why?

	Planned (Budgeted)	Actual
Indirect production costs	266,400 kr	287,920 kr
Engine hours	18,500 hours	19,050 hours
Position costprice before indirect cost. was voted on:		560,000 kr.
The balance of the three inventory accounts for this reconciliation:
Material		60,000 kr
Products in progress		190,000 kr
Finished products		250,000 kr
Stores totaling		500,000 kr

Answer 1

		Planned (Budgeted)	Actual
	Indirect production costs	266,400 kr	287,920 kr
	Engine hours	18,500 hours	19,050 hours
	Position costprice before indirect cost. was voted on:		560,000 kr.
	The balance of the three inventory accounts for this reconciliation:
	Material		60,000 kr
	Products in progress		190,000 kr
	Finished products		250,000 kr
	Stores totaling		500,000 kr
a)	Budgeted factory overhead rate =	14.40	Per engine hours	(266400/18500)
b)	Under-Applied overhead =	13,600	287920 - (19050*14.40)
	Account titles	Debit	Credit
c)	Cost of goods sold	13,600
	Manufacturing overhead		13,600
	Account titles	Debit	Credit
d)	Material	1,632
	Products in progress	5,168
	Finished products	6,800
	Manufacturing overhead		13,600
e)	Method of proporational equalization is more correct as it divides the under applied overhead to all the accounts. And shows correct figure of the profit.