Question

PA2-7 (Algo) Selecting an Allocation Base and Analyzing Manufacturing Overhead [LO 2-3, 2-5]

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	$	601,000			$	662,000
Direct labor cost	$	403,000			$	457,000
Direct labor hours		17,200	hours			18,700	hours
Machine hours		8,200	hours			9,200	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?

Answer 1

1a.	Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated direct labor hours = $601000/17200 = $34.94 per direct labor hour
b.	Applied manufacturing overhead = 18700 x $34.94 = $653378
c.	Under-applied manufacturing overhead = $662000 - $653378 = $8622
2a.	Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated direct labor dollars = $601000/$403000 = 149.13% of direct labor dollars
b.	Applied manufacturing overhead = $457000 x 149.13% = $681524
c.	Over-applied manufacturing overhead = $681524 - $662000 = $19524
3a.	Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated machine hours = $601000/8200 = $73.29 per machine hour
b.	Applied manufacturing overhead = 9200 x $73.29 = $674268
c.	Over-applied manufacturing overhead = $674268 - $662000 = $12268
4	Direct labor hours
	Since the under/over applied manufacturing overhead is the least.