Question

In: Accounting

Assume that Vickers Manufacturing estimates it will spend $1 million on overhead expenses. Vickers is a...

Assume that Vickers Manufacturing estimates it will spend $1 million on overhead expenses. Vickers is a highly automated manufacturing plant; therefore, the majority of its overhead expenses relate to machinery (depreciation, repairs and maintenance, electricity used). Machine hours used would be a reasonable way to allocate overhead costs to products because use of machinery causes (or drives) overhead expenses. Vickers estimates that it will run its machines for 40,000 hours during the year.

(1) Please provide the formula that would be used to calculate Vickers’ predetermined overhead rate and perform the calculation. Why is it necessary to calculate a predetermined overhead rate?

(2) The calculation you used in the formula above should have included an activity base. Considering the different activity bases that could potentially be used, is it relevant that Vickers is described as a “highly automated” manufacturing plant? What might be the result if direct labor hours were used as the activity base (instead of machine hours) in a situation like this?

(3) Using the pre-determined overhead rate calculated above, calculate the overhead that would be allocated to a product that uses 3.5 hours of machine time. What will happen if actual overhead costs turn out to be higher or lower than this calculation?

Solutions

Expert Solution

(1) Calculation of pre - determined overheads rate:

Pre determined overhead rate = Total overhead expenses / number of machine hours

= $1,000,000 / 40,000 machine hours

= $25 per machine hour.

It is necessary to calculate pre determined overheads so that the total overhead expenses of the organisation can be spread over the products manufactured, and it helps in ascertaining the total cost allocated to the product.

(2) Since the basis taken is machine hours, it shows that the company is more depended over the machines and its process of production is automated. This helps to allocate the total cost on the basis of relevant basis.

If the basis would have taken direct labor hours, it would mean that the basis of production is direct labor that shows less automation. The basis should be carefully decided as all the indirect costs would be allocated to products on that basis only.

The result of using direct labor hours as basis would result in allocation of more overheads to the product which consumes more direct labor hours.

(3) Overheads allocated = Pre determined overhead rate * Machine hours

= $25 per machine hour * 3.5 machine hours

= $87.5

If the actual overheads costs are more than allocated overheads it will result into under allocated overheads and hence reduce the cost of goods sold unless adjustment is made. Similarly, if the actual overheads costs are less than allocated overheads it will result into over allocated overheads and hence increase the cost of goods sold unless adjustment is made.

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Manufacturing Expenses Variable                                $3,250,000 Fixed overhead  &nbs
Manufacturing Expenses Variable                                $3,250,000 Fixed overhead                       640,000       3,890,000 Gross Margin                                                  $4,610,000 Selling and administrative expenses Commissions                           $580,000 Fixed marketing expenses       300,000 Fixed admin expenses               450,000      1,330,000 Net Operating Income                                     $3,280,000 Fixed Interest expenses                                       230,000     Income before Taxes                                      $3,050,000      Income Taxes (21%)                                            640,500 Net Income                                                     $2,409,500 Your company is considering out-sourcing the sales and marketing to an agency specializing in these types of sales. The outsourcing would remove the commissions, reduce the marketing by $270,000,...
Manufacturing Expenses Variable                                $3,250,000 Fixed overhead  &nbs
Manufacturing Expenses Variable                                $3,250,000 Fixed overhead                       640,000       3,890,000 Gross Margin                                                  $4,610,000 Selling and administrative expenses Commissions                           $580,000 Fixed marketing expenses       300,000 Fixed admin expenses               450,000      1,330,000 Net Operating Income                                     $3,280,000 Fixed Interest expenses                                       230,000     Income before Taxes                                      $3,050,000      Income Taxes (21%)                                            640,500 Net Income                                                     $2,409,500 Your company is considering out-sourcing the sales and marketing to an agency specializing in these types of sales. The outsourcing would remove the commissions, reduce the marketing by $270,000,...
(Predetermined overhead rates) Knox corp. is budgeted to spend $80,000 on manufacturing overhead in 2016. What...
(Predetermined overhead rates) Knox corp. is budgeted to spend $80,000 on manufacturing overhead in 2016. What would be the predetermined overhead rate if it based the computation on: A. Budgeted direct labor hours of 60,000? B. Budgeted machine hours of 160,000? C. Budgeted direct materials costs of $480,000?
1) In November 2017, a cost accountant estimates next year’s total manufacturing overhead at $790,000. She...
1) In November 2017, a cost accountant estimates next year’s total manufacturing overhead at $790,000. She is experimenting with 3 possible bases or denominators to calculate the overhead rate. The three possible overhead bases for 2018 are: 27,000 direct labor hours, $505,000 direct labor dollars, and 3,800 machine hours. At the end of the year, the actual amounts were: $810,000 overhead, 28,000 direct labor hours, $515,000 direct labor cost, and 4,000 machine hours.                                                                                                                                          Required: a) calculate the three overhead rates.                                                                                                  ...
a. A company manufactures small and large blankets. It estimates $324,000 in overhead during the manufacturing...
a. A company manufactures small and large blankets. It estimates $324,000 in overhead during the manufacturing of 72,000 small blankets and 24,000 large blankets. What is the predetermined overhead rate if a small blanket takes 1 machine hour and a large blanket takes 2 machine hours? b. They make two types of blankets: polyester (poly) and silk. There are two cost pools: setup, with an estimated $100,000 in overhead, and inspection, with $25,000 in overhead. Poly is estimated to have...
Actual expenses accumulated in the manufacturing overhead account during the period are $950,000. At the beginning...
Actual expenses accumulated in the manufacturing overhead account during the period are $950,000. At the beginning of the period, the estimated expense was planned at $930,000 and the number of direct labour hours were estimated at 10,000. During the year, the actual amount of direct labour hours worked was 10,500. Required: 1) Is the manufacturing overhead account over or under-applied, and by what amount? 2) Write a simple journal entry to correct it at year-end. 3) If the MOH contained...
Keeran Corporation estimates that its variable manufacturing overhead is $6.50 per machine-hour and its fixed manufacturing...
Keeran Corporation estimates that its variable manufacturing overhead is $6.50 per machine-hour and its fixed manufacturing overhead is $280,080 per period. If the denominator level of activity is 7,200 machine-hours, the predetermined overhead rate would be: Multiple Choice $650.00 per machine-hour $38.90 per machine-hour $6.50 per machine-hour $45.40 per machine-hour
Aspen Company estimates its manufacturing overhead to be $1,121,000 and its direct labor costs to be...
Aspen Company estimates its manufacturing overhead to be $1,121,000 and its direct labor costs to be $590,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $178,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $303,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $128,000. Actual...
Aspen Company estimates its manufacturing overhead to be $631,250 and its direct labor costs to be...
Aspen Company estimates its manufacturing overhead to be $631,250 and its direct labor costs to be $505,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $195,600. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $326,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $130,400. Actual...
Aspen Company estimates its manufacturing overhead to be $625,000 and its direct labor costs to be...
Aspen Company estimates its manufacturing overhead to be $625,000 and its direct labor costs to be $500,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $195,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $325,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $130,000. Actual...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT