Question

Amberjack Company is trying to decide on an allocation base to use to assign manufacturing overhead to jobs. The company has always used direct labor hours to assign manufacturing overhead to products, but it is trying to decide whether it should use a different allocation base such as direct labor dollars or machine hours.

Actual and estimated data for manufacturing overhead, direct labor cost, direct labor hours, and machine hours for the most recent fiscal year are summarized here:

	Estimated Value				Actual Value
Manufacturing overhead cost	$	604,000			$	665,000
Direct labor cost	$	406,000			$	460,000
Direct labor hours		17,500	hours			19,000	hours
Machine hours		8,500	hours			9,500	hours

Required:
1. Based on the company’s current allocation base (direct labor hours), compute the following:

a. Predetermined overhead rate. (Round your answer to 2 decimal places.)



b. Applied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



c. Over- or underapplied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



2. If the company had used direct labor dollars (instead of direct labor hours) as its allocation base, compute the following:

a. Predetermined overhead rate. (Round your answer to 2 decimal places, i.e. 3.63%)



b. Applied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



c. Over- or underapplied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



3. If the company had used machine hours (instead of direct labor hours) as its allocation base, compute the following:

a. Predetermined overhead rate. (Round your answer to 2 decimal places.)



b. Applied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



c. Over- or underapplied manufacturing overhead. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)



4. Based on last year’s data alone, which allocation base would have provided the most accurate measure for applying manufacturing overhead costs to production?

	Machine Hours
	Direct Labor Hours
	Direct Labor Cost

Answer 1

Solution 1:

estimated manufacturing overhead = $604,000

estimated direct labor hours = 17500

a. Predetermined overhead rate = $604,000 / 17500 = $34.51 per hour

b. Applied overhead = Actual direct labor hours * Predetermined overhead rate = 19000 * 34.51 = $655,690

c. Acutal overhead incurred = $665,000

Underapplied overhead = $665,000 - $655,690 = $9,310

Solution 2:

estimated manufacturing overhead = $604,000

estimated direct labor dollars = $406,000

a. Predetermined overhead rate = $604,000 / $406,000 = 148.77%

b. Applied overhead = Actual direct labor hours * Predetermined overhead rate = 460000 * 148.77% = $684,342

c. Acutal overhead incurred = $665,000

Overapplied overhead = $684,342 - $665,000 = $19,342

Solution 3:

estimated manufacturing overhead = $604,000

estimated machine hours = 8500

a. Predetermined overhead rate = $604,000 / 8500 = $71.06 per hour

b. Applied overhead = Actual direct labor hours * Predetermined overhead rate = 9500 * 71.06 = $675,070

c. Acutal overhead incurred = $665,000

Overapplied overhead = $675,070 - $665,000 = $10,070

Solution 4:

The underapplied / overapplied overhead are lowest if we allocate the overhead on the basis of direct labor hours, hence direct labor hours provided the most accurate measure for applying manufacturing costs to production.