Question

XYZ Company is using job costing system. The allocation base for overhead is number of machine hours. The company uses normal costing to compute the overhead allocation rate.

The following data are available for 2017 year:

Estimated total overhead cost                               $270,000

Estimated total number of machine-hours           200,000

Actual total overhead cost                                     $290,000

Actual total number of machine-hours                 220,000

            Job 630 used 14, 000 machine hours.

            The company had job 630 and other jobs during the year.

a.   Calculate the estimated overhead allocation rate.

b.   Compute the overhead allocated to job 630.

c.   Calculate total allocated overhead and analyze the value of allocated overhead.

d.   Explain the Concept of Job Costing?

Answer 1

Solution a:

Overhead allocation rate = Estimated overhead cost / estimated machine hours = $270,000/200000 = $1.35 per hour

Solution b:

Machine hours used in Job 630 = 14000

Allocated overhead to job 630 = 14000*1.35 = $18,900

Solution c:

Actual total machine hours = 220000

Actual allocated overhead = 220000*1.35 = $297,000

Actual overhead cost incurred is $290,000 however we have allocated overhead on the basis of machine hours amounting $297,000, hence overehead are overapplied to jobs and overapplied overhead of $7,000 will be closed to Cost of Goods sold.

Solution d:

Job costing means to account for costs of materials, labor, and overhead for a specific job. Job costing is a tool for tracing specific costs to individual jobs and reviewing them to see if the costs can be reduced in later jobs. An alternative use is to see if any excess costs incurred can be billed to a customer or not.