Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $128,800 of manufacturing overhead for an estimated allocation base of $92,000 direct material dollars to be used in production. The company has provided the following data for the just completed year:

  

Purchase of raw materials	$	138,000
Direct labor cost	$	88,000
Manufacturing overhead costs:
Indirect labor	$	127,600
Property taxes	$	8,900
Depreciation of equipment	$	16,000
Maintenance	$	12,000
Insurance	$	9,300
Rent, building	$	33,000

  

	Beginning		Ending
Raw Materials	$	22,000	$	15,000
Work in Process	$	46,000	$	38,000
Finished Goods	$	70,000	$	58,000

  

Required:
1-a.	Compute the predetermined overhead rate for the year.

  

1-b. Compute the amount of underapplied or overapplied overhead for the year.

Answer 1

1a) Compute the predetermined overhead rate for the year.

Predetermine overhead rate = Estimated overhead/estimated direct material dollars

                                          = 128800/92000

Predetermine overhead rate = 1.4 per direct material dollars

1b) Compute the amount of underapplied or overapplied overhead for the year.

Applied overhead = 1.4*145000 = 203000

Actual overhead = (127600+8900+16000+12000+9300+33000) = 206800

Over/under applied overhead = applied overhead-actual overhead

                                         = 203000-206800

Under applied overhead = 3800