The Desain water plant bottles purified and flavored waters in a variety of size

Question

The Desain water plant bottles purified and flavored waters in a variety of sizes (20,36,48,64 ounces) for sale through vending machines and retail stores. Volume is measured as bottled ounces. The plant's annual budgeted fixed manufacturing overhead amounts to $1.8 Million, and variable manufacturing overhead is projected at $0.005 per bottled ounce. Projected volume in the Naples plant next year is 200 million ounces. Actual volume for the year accumulated to 210 million ounces and total manufacturing overhead incurred (both fixed and variable) was $2.85 million.

a. calculate the Densian Naples plant overhead rate.

b. How much overhead was absorbed to products in the naples plant?

c. Calculate the Densian Naples plant's over- or underabsorbed overhead.
d.Describe the effect on income when the over-or underabosorbed overhead calculated in (c) is written off to cost of goods sold.

Explanation / Answer

a. Calculate the Densian Naples plant overhead rate.

    Annual budgeted Fixed OH                            $1.8M
    Budgeted Variable OH    $0.005 x 200M         $1.0M
    Total Budgeted overhead                             $2.8M

     Overhead Rate
     Total Budgeted Overhead / Projected Volume = $2.8M / 200
                                                                        = $0.014

b. How much overhead was absorbed to products in the naples plant?
Overhead absorbed = Predetermined overhead rate x actual quantity
                               =       $0.014 x 210M ounces
                                 =       $2.94M

c. Calculate the Densian Naples plant's over- or underabsorbed overhead.

     Actual overhead (Fixed + Variable)    = $2.85M
     Less : Overhead absorbed                = $2.94M  
               Overhead over absorbed             $0.09M  
                                                             =========
d. Describe the effect on income when the over-or underabosorbed overhead calculated in (c) is
    written off to cost of goods sold.

  In c, calculation shows over absorption of overheads to the extent of $0.09M. It means the net income prior to write-off the over absorption is less by $0.09M. After set off net income will result in increase by $0.09M.

The Debit balance in the Overhead Control Account may directly be transferred to Profit & Loss (or the Income Summary Account).

  

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