Question

2. Assigning Overhead to individual jobs – a. Predetermined Overhead rate is used to assign overhead costs to individual jobs in a manner which approximates their relative usage of overhead items based on estimated data that is established before the period begins. b. But by definition, overhead cannot be directly traced to individual jobs. Predetermined Overhead Rate = Estimated Total Factory Overhead Costs Estimated Activity Base Predetermined Overhead Rate Example: • Assume total manufacturing overhead is estimated to be $ 10,000,000 • Estimated total direct labor hours are estimated to be 50,000 hours Predetermined Overhead Rate: Why use estimated data? • Waiting until the year is over to determine actual overhead costs would be too late. Managers want cost data immediately. • Overhead rates, if based on actual costs and activity, would vary substantially from month to month. Much of this variation would be due to random changes in activity. Process:  At the beginning of the year we estimate our total manufacturing overhead costs $  Then we estimated our total activity base … this is either direct labor hours or machine hours.  Calculate our predetermined overhead rate.  Apply to individual jobs based on actual labor hours. PLEASE COMPLETE THE CHART BELOW: Jobs Actual Hours Overhead Rate Overhead applied McDonalds 1,050 $200 Tunnel 2,900 $200 Target 6,000 $200 Stadium 40,120 $200 50,070

Answer 1

Overhead rate is determined at beginning of the year using previous year data and keeping in mind all the changes that are going to take place in the year.

The overhead that will be used and apportioning method are determined and then charged to all the jobs.

Such rate is used till end of the year and then difference between overhead applied and actual overheads is adjusted. Such adjusted may be debit or credit effect depending upon whether overheads are charged more or less.

This method helps in determining proper rate and the company does not have to wait to see actual overheads that will be incurred.

In the above table, the total overheads amount is $10,000,000 while direct labour hours are 50,000.

The overhead rate comes to $200 per direct kabir hour (10,000,000/50,000).

For all the jobs the details re as below-

Overhead rate is $200 per direct labour hour for all the jobs mentioned below.

1) McDonald's - Actual hours is 1,050

Overheads applied = 1,050 * 200 = $ 210,000

2) Tunnel - Actual hours is 2,900

Overheads applied = 2,900 * 200 = $ 580,000

3) Target - Actual hours is 6,000

Overheads applied = 6,000 * 200 = $ 1,200,000

4) Stadium - Actual hours is 40,120

Overheads applied = 40,120 * 200 = $ 8,024,000

Total actual hours are 50,070 while estimated hours were 50,000. Thus, actual hours are more by 70. Thus overhead applied will be more by

70 * 200 = $14,000. This amount will be reversed from manufacturing account at the end of the year so that applied overheads matches with actual overheads.