The following calendar year information about the Tahoma Corporation is availabl

Question

The following calendar year information about the Tahoma Corporation is available on December 31:

Advertisng Expense: $28,800

Depreciation of factory equipment: 42,320

Depreciation of office equipment: 10,800

Direct Labor: 142,600

Factory Utilities: 35,650

Interest Expense: 6,650

Inventories, January 1:

Raw Materials: 3,450

Goods in process: 17,250

Finished Goods: 35,650

Inventories, December 31

Raw materials: 2,300

Goods in Process: 20,700

Finished Goods: 31,050

Raw Materials Purchases: 132,450

Rent on factory building: 41,400

Indirect Labor:51,750

Sales Commissions: 16,500

The company applies overhead on the basis of 125% of direct labor costs.

1. Calculate the amount of over- or under-applied overhead.

What is the significance of this over- or under-applied amount of overhead?

Explanation / Answer

Actual overhead

Depreciation of factory equipment            42,320

Factory utilities                                                35,650

Rent on factory building                                41,400

Indirect labor                                                   51,750

Actual overhead                                            171,120

Applied 142,600 @12%                               178,250

Over applied                                                       7,130

Over head is applied since actual overhead is known till year end ,so to calculate the cost of products we need to calculate the overhead by way of application

So in case the actual overhead is less than applied overhead it means that the overhead is overapplied and cost charged to product is more than it should be and vice versa hence we need to know the over and under applied , so that we can charge the true cost

Actual overhead

Depreciation of factory equipment            42,320

Factory utilities                                                35,650

Rent on factory building                                41,400

Indirect labor                                                   51,750

Actual overhead                                            171,120

Applied 142,600 @12%                               178,250

Over applied                                                       7,130

Over head is applied since actual overhead is known till year end ,so to calculate the cost of products we need to calculate the overhead by way of application

So in case the actual overhead is less than applied overhead it means that the overhead is overapplied and cost charged to product is more than it should be and vice versa hence we need to know the over and under applied , so that we can charge the true cost

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