Question

The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.

Required:

a. How much overhead is allocated?
b. What is the over/under-absorbed overhead?

Answer 1

a.

Predetermined overhead rate for fixed overhead = Estimated fixed overhead / Estimated machine hours

= 600,000/6,000

= $100 per machine hour

Predetermine overhead rate for variable overhead = Estimated variable overhead / Estimated direct labor hour

= 800,000/80,000

= $10 per direct labor hour

Applied fixed overhead = Actual machine our used x Predetermined overhead rate for fixed overhead

= 5,500 x 100

= $550,000

Applied Variable overhead -= Actual direct labor hour used x Predetermine overhead rate for variable overhead

= 90,000 x 10

= $900,000

Allowed overhead = Applied fixed overhead +Applied Variable overhead

= 550,000+900,000

= $1,450,000

b.

Actual fixed overhead = $700,000

Actual variable overhead = $750,000

Actual overhead cost = Actual fixed overhead +Actual variable overhead

= 700,000+750,000

= $1,450,000

Since actual overhead is same as allocated overhead, hence overhead is neither over-absorbed nor under absorbed.