In: Accounting
Predetermined Overhead Rates, Overhead Variances, Unit Costs
Primera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided:
Department 1 | Department 2 | ||
Direct labor hours | 640,000 | 128,000 | |
Machine hours | 16,000 | 192,000 | |
Overhead cost | $384,000 | $1,152,000 |
Actual results reported by department and product during the year are as follows:
Department 1 | Department 2 | ||
Direct labor hours | 627,200 | 134,400 | |
Machine hours | 17,600 | 204,800 | |
Overhead cost | $400,000 | $1,232,000 |
Product 1 | Product 2 | ||
Direct labor hours | |||
Department 1 | 480,000 | 147,200 | |
Department 2 | 96,000 | 38,400 | |
Machine hours | |||
Department 1 | 8,000 | 9,600 | |
Department 2 | 24,800 | 180,000 |
Required:
1. Compute the plantwide predetermined overhead
rate.
$ per direct labor hour
Calculate the overhead assigned to each product.
Product 1 | $ |
Product 2 | $ |
2. Calculate the predetermined departmental overhead rates. If required, round your answers to the nearest cent.
Department 1 | $ per direct labor hour |
Department 2 | $ per machine hour |
Calculate the overhead assigned to each product.
Product 1 | $ |
Product 2 | $ |
3. Using departmental rates, compute the
applied overhead for the year.
$
What is the under- or overapplied overhead for the firm?
$
Feedback
1. The total annual driver level is a factor in this calculation.
2. For departmental rates, OH rates are assigned to each production department either per machine hrs. or direct labor hrs.
3. Calculate over- or underapplied by subtracting Applied OH from Actual OH. Label it over or under.
4. Prepare the journal entry that disposes of the overhead variance calculated in Requirement 3, assuming it is not material in amount.
Req 1: Plant wide rate | |||||||
plant wide overhead rate: Total overheads / Total labour hours | |||||||
Total overheads = 384,000+1152,000 = $1536,000 | |||||||
Total labour hours = 640,000 + 128,000 = 768,000 labour hours | |||||||
Plant wide rate = Total overheads / Total labour hours | |||||||
(1536,000 / 768,000 ) = $2 per labour hours | |||||||
Product 1 | Pproduct 2 | ||||||
Labur hours | |||||||
Department 1 | 480000 | 147200 | |||||
Department 2 | 96000 | 38400 | |||||
Total Labour hours | 576000 | 185600 | |||||
Overheads applied @$2 per hour | 1152000 | 371200 | |||||
Overheads applied | |||||||
Product 1 | $1,152,000 | ||||||
Product 2 | $371,200 | ||||||
Req 2: Departmental overhead rate | |||||||
Department 1: Total overheads of department / labour horus | |||||||
(384000 /640000) = $ 0.60 per labour hour | |||||||
Department 2: Total overheads of department/ Machine hours | |||||||
(1152,000 /192000) = $ 6 per machine hour | |||||||
Product 1 | Pproduct 2 | Total | |||||
Labour hours of Dept 1 | 480000 | 147200 | |||||
Machine hours of Dept 2 | 24800 | 180000 | |||||
Overheads assigned: | |||||||
Department 1(@ $ 0.60 per labour hour) | 288000 | 88320 | 376320 | ||||
Department 2($6.00 per machine hour) | 148800 | 1080000 | 1228800 | ||||
Total overheads assigned | 436800 | 1168320 | 1605120 | ||||
Overehads applied | |||||||
Product 1 | $436,800 | ||||||
Product 2 | $1,168,320 | ||||||
Req 3: | |||||||
As computed above, The total overheads assigned is $ 1605,120 (i.e. 436800+1168320) | |||||||
Under-over applied overheads: | |||||||
Overheads applied: | 1605120 | ||||||
Less: Overheads incurred | |||||||
Deptt 1 | 400,000 | ||||||
Deptt 2 | 1232000 | 1632000 | |||||
Under applied overheads | 26880 | ||||||
Req 4: Joural entry is as follows: | |||||||
Cost of goods sold Account Dr. $ 26,880 | |||||||
Manufacturing overeheads | $26,880 | ||||||