Question

Question 2

Technics Inc., a manufacturing company, utilizes job order costing. Each division establishes its own estimates regarding overhead which are as follows:

	Division A	Division B
Total estimated overhead	$128,000	$261,000
Total estimated machine hours	16,000	72,500
Total estimated direct labor hours	10,000	15,000
Total actual overhead	$130,000	$250,000
Total actual machine hours	17,000	25,000
Total actual direct labor hours	18,000	14,000

Division A allocates overhead on the basis of machine hours

Division B allocates overhead on the basis of direct labor costs

Required:

For Division A and Division B,

1. Calculate the overhead application rate for the year.
2. What is the amount of applied overhead for the year?
3. What is the amount of under or overapplied overhead for the year? Indicate whether it is over- or underapplied

Answer 1

Division A allocates overhead on the basis of machine hours

Division B allocates overhead on the basis of direct labor hours

a. Overhead application = Total estimated cost/estimated hourse in allocation base

Department A:

Here allocation base is machine hours

$128,000/16,000

=$8 per machine hour

Department B:

Here allocation base is labor hours

$261,000/15,000

=$17.4 per direct labor hour

b.Applied overhead = overhead application rate* Actual cost driver

Department A:

$8 per machine hour*17,000 Actual machine hours

=$136,000

Department B:

$17.4 per direct labor hour*14,000

=$243,600

c.under /over absorbed

This will be based on actual overhead and applied overhead

if applied overhead>actual overhead it is over applied

if applied overhead<actual overhead it is underapplied

Department A:

(Over)under applied overhead = Actual overhead-applied overhead

=$130,000-$136,000

=($6,000)

as the actual cost is lower than applied cost the overhead is over applied by $6,000

Department B:

=$250,000-$243,600

=$6,400 under applied

As the actual overhead is higher than the applied overhead the overhead is under applied by $6,400

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