Central Redi-Mix Concrete, Inc. applies manufacturing overhead based on number o
ID: 2478654 • Letter: C
Question
Central Redi-Mix Concrete, Inc. applies manufacturing overhead based on number of yards of concrete produced. At the beginning of 2014 management estimated the plant would produce 100,000 yards of concrete during the coming year. At the same time manufacturing overhead was budgeted to be $500,000. At the end of the year the firm had produced 110,000 yards of concrete and incurred $550,000 of manufacturing overhead.
Required:
1. Compute the overhead application rate for 2014.
2. Calculate the amount of overhead applied to work-in-process during the year. 3. Compute the overhead variance. Was it favorable or unfavorable and why? 4. Explain why we use a predetermined rate to apply manufacturing overhead to work-in-process
versus the way a company accounts for direct labor and direct material.
Explanation / Answer
1)
Overhead application rate
= $500000 / 100000 yards of concrete
= $5/yard of concrete
2)
Overhead applied
= actual production x overhead application rate
= 110000 yards x $5/yard
= $550000
3)
Overhead variance = Actual overhead – overhead applied = $550000 - $55000 = 0
As the overhead applied and overhead actually incurred are same, there is no overhead variance.
4)
Direct material and direct labour are direct costs in the sense that they vary directly with the level of activity and can easily be traced to the production and consequently could be assigned to the product costs directly. But manufacturing overheads are indirect costs and could not be directly traced to the products for which they are incurred. Therefore manufacturing overhead are allocated to the products by using a predetermined overhead absorption rate based on some rational basis like, number of units produced, direct labours hours used in the production etc.
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