Factory Overhead Rates and Account Balance Prostheses Industries operates two fa

Question

Factory Overhead Rates and Account Balance

Prostheses Industries operates two factories. The manufacturing operations of Factory 1 are machine intensive, while the manufacturing operations of Factory 2 are labor intensive. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:

a. Determine the factory overhead rate for Factory 1. Round your answer to the nearest cent.
$ per machine hour

b. Determine the factory overhead rate for Factory 2. Round your answer to the nearest cent.
$ per direct labor hour

c. Determine the factory overhead applied to production in each factory for January.

d. Determine the balances of the factory accounts for each factory as of January 31, and indicate whether the amounts represent overapplied or underapplied factory overhead.

e. Explain why Factory 1 uses machine hours to allocate factory overhead while Factory 2 uses direct labor hours.
Factory overhead should be allocated using a base that is related to (causes) the overhead costs incurred. Factory 1 has a manufacturing operation, and Factory 2 has a manufacturing operation. Thus, Factory 1 uses machine hours, and Factory 2 uses direct labor hours to allocate factory overhead.

Factory 1 Factory 2 Estimated factory overhead cost for fiscal year beginning August 1 $1,135,740 $520,800 Estimated direct labor hours for year 8,400 Estimated machine hours for year 24,690 Actual factory overhead costs for August $91,000 $45,240 Actual direct labor hours for August 760 Actual machine hours for August 1,930

Explanation / Answer

Solution:

Part a & b -- factory overhead rate for Factory 1 and Factory 2

Factory 1

Factory 2

Estimated Factory Overhead Cost for the Year (A)

$1,135,740

$520,800

Allocation Base

Machine Hours

Direct Labor Hours

Estimated Allocation Base (B)

24,690 MHs

8,400 DLHs

Factory Overhead Rate (A/B)

$46 per MH

$62 per DLH

Part c -- factory overhead applied to production in each factory for January

Actual Usage

Factory Overhead Rate

Applied Factory Overhead

(A)

(B)

(A*B)

Factory 1

1930 Machine Hours

$46 per MH

$88,780

Factory 2

760 Direct Labor Hours

$62 per DLH

$47,120

Part d -- balances of the factory accounts for each factory as of January 31, and indicate whether the amounts represent overapplied or underapplied factory overhead

Applied Factory Overhead (From Part c)

Actual Factory Overhead Incurred

Over or Under Applied Factory Overhead

Factory 1

$88,780

$91,000

$2,220

Under Applied

Factory 2

$47,120

$45,240

$1,880

Over Applied

Note --- Applied Overhead for Factory 1 is lesser than actual factory overhead, it means the overheads are Under Applied.

Applied Overhead for Factory 2 is higher than actual overhead, it means overheads are over applied.

Part e --- you already have

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Pls ask separate question for remaining parts.

Factory 1

Factory 2

Estimated Factory Overhead Cost for the Year (A)

$1,135,740

$520,800

Allocation Base

Machine Hours

Direct Labor Hours

Estimated Allocation Base (B)

24,690 MHs

8,400 DLHs

Factory Overhead Rate (A/B)

$46 per MH

$62 per DLH

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