Question

ABC Manufacturing Company uses a job-order costing system. The company uses predetermined overhead rates in applying manufacturing overhead to individual jobs. The predetermined overhead rate in the Chair Department is based on direct labour hours, the rate in the Table Department is based on machine hours, and the rate in the Desk Department is based on direct labour cost. At the beginning of the most recent year, members of the management team made the following estimates for the year:

(Estimated)                                                                                                     Department                                                                                                    

                                                                                                 Chair                  Table              Desk

........ Direct labour hours...........................................          40,000               26,000           20,000

........ Machine hours.....................................................          50,000               18,000           30,000

........ Security guards’ hours.....................................                   80                        70                    60

........ Direct labour cost..............................................     $500,000         $250,000      $320,000

........ Direct materials..................................................       $65,000            $56,000        $32,000

........ Indirect materials..............................................       $20,000            $30,000        $40,000

........ Total manufacturing overhead....................     $220,000         $234,000      $112,000

........ Administrative salaries...................................     $100,000            $75,000        $80,000

The records show the following information for Job 1A, which was entered into production on June 23 and completed on July 18:

                                                                                                                               Department                                                                                                    

                                                                                                 Chair                  Table             Desk

         Direct labour hours...........................................                 350                     160                 100

         Machine hours.....................................................                 100                        50                    95

         Direct labour cost..............................................          $1,600               $1,200           $1,400

         Direct materials..................................................             $600               $1,250           $2,000

On December 31, the company showed the following actual costs and operating data for all jobs worked on during the year:                                                                                                                                                                                                                                              Department   

                                                                                                 Chair                  Table             Desk

........ Direct labour hours...........................................          41,000               28,000           23,000

........ Machine hours.....................................................          52,000               17,600           32,000

........ Direct labour cost..............................................     $506,000         $240,000      $310,000

........ Direct materials..................................................       $63,400            $54,300        $30,600

........ Manufacturing overhead................................     $230,000         $235,000      $108,000

Instructions

a)     Calculate the predetermined overhead rates for the three departments.

b)    Calculate the total manufacturing overhead applied to Job 1A.

c)     Calculate the amount of under- or over-applied overhead in each department at the end of the year and indicate whether it is under- or over-applied.

d) Would you want to re-evaluate any of the predetermined overhead rates and if so, why.

Answer 1