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Arensky Company uses normal costing to account for overhead in its job costing system. There are...

Arensky Company uses normal costing to account for overhead in its job costing system. There are 2 departments in the company: Designing and Machining. The Designing Dept. is labor intensive; the Machining Dept. is machine intensive. (OH= Overhead; DLH= Direct Labor Hours; MH= Machine Hours.) The budget for 2019 is as follows:

Designing   Machining

Est. OH $2,000,000 $5,600,000

Est DLH 40,000 Hours 10,000 Hours

Est MH. 20,000 Hours 70,000 Hours

Actual Results are as follows:

Designing Machining

Actual OH $2,100,000 $5,650,000

Actual DLH 41,500 Hours 11,000 Hours

Actual MH 19,800 Hours 72,000 Hours

A. Using the most logical allocation base, Calculate the OH Allocation rate for each department. Be sure to state your final answer in proper units.

B. For Each Department, Calculate How much OH is Allocated

C. For Each Department, Give the journal entry to record-over or under-allocated overhead

D. Why is Normal Costing Method preferred to the Actual Costing Method.

Solutions

Expert Solution

A. The calculation of OH allocation base for each department is as follows:

The formula is = Total estimated overhead cost/Total estimated quantity of the overhead allocation base

In designing department, The allocation base should be labor hours as it is labor intensive.

Budgeted overhead divided by allocation base = 20,00,000/40,000 = $ 50 per labor hour

In machining department, The allocation base should be machine hours as it is machine intensive.

Budgeted overhead divided by allocation base = 56,00,000/70,000= $ 80 per machine hour

B. Overhead allocated to each department is as follows:-

Designing Department= 41500 hours * $50 (as calculated in step A)= $20,75,000

Machining Department= 72000 hours * $80(as calculated in step A)= $57,60,000

C. First of all, we have to calculate the over and under-allocated overhead

Designing($) Machining($)
Overhead incurred (actual) 21,00,000 56,50,000
Overhead allocated 20,75,000 57,60,000
Under-allocated overehead 25,000
Over-allocated overhead 1,10,000
Total over allocated overhead 85,000

The journal entry for machining department would be:-

Manufacturing overhead 1,10,000

To cost of goods sold 1,10,000

The journal entry for designing department would be:-

Cost of goods sold 25,000

To manufacturing overhead   25,000

D. The normal costing method is preferred over Actual costing method because in normal costing, the overheads are allocated on the budgeted amount for the whole year rather as in actual costing where overheads are allocated for each item produced and not for the whole year.

ekkarill92 answered 1 year ago
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