The P Company applies overhead costs to jobs using machine hours as the allocati

Question

The P Company applies overhead costs to jobs using machine hours as the allocation base. At the beginning of the year, 2014, the company estimated manufacturing overhead costs to be $1,400,000 and estimated total machine hours (the expected volume) to be 56,000 hours. During the year many jobs were completed. One job, Job #125 was completed and had the following data: total direct material costs were $2,500, total direct labor costs were $3,250, and actual machine hours worked on the job totaled 75 hours. At the end of 2014, the corporate controller determined that total actual overhead costs incurred for all jobs totaled $1,450,000 and the actual machine hours incurred during 2014 for all jobs totaled 58,400 hours. Given this data, answer the following questions with supporting computations. Required: a. Compute the predetermined overhead rate for 2014. Be sure to include a proper label. b. If 25 units were made in Job #1275, determine the total cost of the job and the cost per unit. c. Determine the total amount of overhead that was Under- or Over-Applied for the year 2014. Be sure to specifically state whether the amount you determined is UNDER or OVER-APPLIED overhead. d. If the entire overhead variance is closed to cost of goods sold, what is the effect on gross profit and net operating income? e. If the company had used CAPACITY (normal) volumes, which are greater than the expected volumes used above, to determine the predetermined overhead rate, what would be the likely impact on the following items: 1) the predetermined overhead rate, 2) the amount of overhead applied to jobs, and 3) the resulting over/under applied computations?

Explanation / Answer

Question a. Estimated Manufacturing Overhead 1400000 Estimated Machine Hours 56000 Predetermined Rate per machine hour 25 Question b. Material 2500 Direct Labour Cost 3250 Overhead (75 x 25) 1875 Total Cost 7625 No of Units Produced 25 Cost per unit 305 Question c. Actual Overhead for 2014 1450000 Actual Machine hours 58400 Actual Overhead rate 24.83 Actual Overhead to Job No 125 = 75 x 24.83 = 1862.16 Overhead Overapplied = 1875-1862.16 = 12.84 Question d. Both Gross profit and Net operating income will be reduced by amount of Variances. Question e1. No change in the predetermined rate. Question e2 Amount of Overhead applied to the job is Greater than tha actual. Question e3 This result is Over applied computation.

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