Amberjack Company is trying to decide on an allocation base to use to assign man

Question

Amberjack Company is trying to decide on an allocation base to use to assign manufacturing overhead to jobs. In the past, 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:

Amberjack Company is trying to decide on an allocation base to use to assign manufacturing overhead to jobs. In the past, 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:

Explanation / Answer

Requirement 1:
a)Predetermined overhead rate
= Estimated Manufacturing overhead cost / Estimated Direct Labor Hours
= 732000/14640
= $50/hour

b) Applied manufacturing overhead
= Manufacturing overhead cost / Direct Labor Hours
= 842000 / 16600
= $50.72/hour

c) Over or underapplied manufacturing overhead
= Predetermined overhead rate -  Applied manufacturing overhead
= $50 - $50.72
= -$0.72


Requirement 2:
a)Predetermined overhead rate
= Estimated Manufacturing overhead cost / Estimated Direct Labor Dollors*100
= 732000/366000*100
= 200%

b) Applied manufacturing overhead
= Manufacturing overhead cost / Direct Labor Dollors*100
= 842000 / 377000 * 100
= 223%

c) Over or underapplied manufacturing overhead
= Predetermined overhead rate -  Applied manufacturing overhead
= 200 - 223
= -23%


Requirement 3:
a)Predetermined overhead rate
= Estimated Manufacturing overhead cost / Estimated Machine Hours
= 732000/18300
= $40/hour

b) Applied manufacturing overhead
= Manufacturing overhead cost / Machine Hours
= 842000 / 17500
= $48.11/hour

c) Over or underapplied manufacturing overhead
= Predetermined overhead rate -  Applied manufacturing overhead
= $40 - $48.11
= -$8.11


Requirement 3:
Thus, it is very evident that the Direct Labor Hour Method is the most appropriate one as there is a negligible difference of $0.72/hr when compared To Direct Labor Dollar Method and Machine Hour Method where there is an error of 23% and $8.11/hr respectively.

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