Question

Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $820,000. The company used 1,000 hours of processing on Job No. B12 during the period and incurred overhead costs totaling $840,000. The budgeted machine hours for the year totaled20,000. How much overhead should be applied to Job No. B12?

• $41,000

• $820

• $42,000

• $840
  
  

Answer 1

Concepts and reason

Job order Costing: It is a method of cost accounting, in which cost is collected and accumulated for each job, work order, or project separately. Especially the job order costing is followed in organizations where customized goods are produced.

Manufacturing overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs.

Direct labor cost: It refers to the cost of providing wages to the workers who are directly associated with the production of goods or services rendered to the customers. The cost of direct labour includes the wages, payroll taxes, and all the benefits sponsored by the manufacturer.

Direct materials: Direct materials are the raw materials which are directly related with the production of the goods.

Completion of Job: After a job is completed, the cost of the job is transferred to finished goods inventory from work-in-process inventory.

Fundamentals

Beginning work-in process: It refers to the units that are yet to be converted into finished goods. It belongs to the previous period’s closing balance of work-in process that is shown as beginning balance for the current period.

Ending work-in process: It refers to the costs of the units that could not be converted into the finished goods in the current period.

Manufacturing overhead rate: It is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. It is calculated by dividing the estimated total manufacturing costs by an allocation base (estimated direct labour costs or estimated number of machine hours). It is also known as predetermined overhead rate.

The formula to calculate the manufacturing overhead rate is shown below:

${\rm{Manufacturing overhead rate = }}\frac{{{\rm{Estimated}}\,{\rm{overhead}}\,{\rm{cost}}}}{{{\rm{Estimated}}\,{\rm{machine}}\,{\rm{hours}}\,{\rm{usage}}}}$

Actual overhead cost: These are the indirect manufacturing costs that are actually incurred while producing goods. It is calculated by multiplying the actual labour hours or machine hours used with the number of units produced.

Applied Overhead cost: These are the indirect manufacturing costs that are allocated to the goods produced. It is calculated by multiplying the manufacturing overhead rate with the actual activity used for production.

The formula for manufacturing overhead cost applied is shown below:

${\rm{Manufacturing overhead cost applied = }}\left( \begin{array}{l}\\{\rm{ Total machine hours}}\,{\rm{used}} \times \\\\{\rm{ Rate per machine - hour}}\\\end{array} \right)$

Over or under applied overhead:

When the applied overhead cost is more than the actual overhead cost for a particular period, then the overhead is over applied.

When the applied overhead cost is less than the actual overhead cost, then the overhead cost is under applied.

The formula for under applied or over applied overhead cost is shown below:

$\left. \begin{array}{l}\\{\rm{Under applied or over }}\\\\{\rm{applied overhead cost }}\\\end{array} \right\}{\rm{ = }}\left( \begin{array}{l}\\{\rm{Actual manufacturing overhead costs}} - \\\\{\rm{Manufacturing overhead cost applied}}\\\end{array} \right)$

Calculate the manufacturing overhead rate as below;

$\begin{array}{c}\\{\rm{Manufacturing overhead rate = }}\frac{{{\rm{Estimated}}\,{\rm{overhead}}\,{\rm{cost}}}}{{{\rm{Estimated}}\,{\rm{machine}}\,{\rm{hours}}\,{\rm{usage}}}}\\\\ = \frac{{\$ 820,000}}{{20,000\,}}\\\\ = \$ 41\\\end{array}$

Determine the overhead cost that should be applied to Job No. B312 as below;

$\begin{array}{c}\\{\rm{Manufacturing overhead cost applied = }}\left( \begin{array}{l}\\{\rm{ Total machine hours}}\,{\rm{used}} \times \\\\{\rm{ Rate per machine - hour}}\\\end{array} \right)\\\\ = 1,000 \times \$ 41\\\\ = \$ 41,000\\\end{array}$

Ans:

The overhead cost that should be applied to Job No. B312 is $41,000.