Working Papers, Chapters 1-17 for Warren/Reeve/Duchac's Accounting, 26th and Financial Accounting, 14th
Working Papers, Chapters 1-17 for Warren/Reeve/Duchac's Accounting, 26th and Financial Accounting, 14th
26th Edition
ISBN: 9781305392373
Author: Carl Warren, Jim Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 19, Problem 19.5CP

(1)

To determine

Predetermined factory overhead rate

Normally, factory overhead costs are applied or allocated to cost of job based on predetermined factory overhead rate. The formula to calculate the predetermined factory overhead rate is as follows:

Predetermined factory overhead rate = Estimated total factory overhead costsEstimated activity rate

To Calculate: The predetermined factory overhead rate for each alternative base for M Industries.

(1)

Expert Solution
Check Mark

Answer to Problem 19.5CP

The predetermined overhead rate for alternative activity base is prepared as follows:

Direct labor cost:

Predetermined overhead rate = Total overhead cost Table (1)Total direct labor cost Table (2)=$4,200,000$21,000,000=20% of direct labor cost

Machine hours:

Predetermined overhead rate = Total overhead cost Table (1)Total machine hours Table (3)=$4,200,000500,000=$8.40 per machine hour

Working notes:

Total overhead for (2012 – 2016) is calculated as follows:

Factory Overhead (Actual) Amount ($)
2012 790,000
2013 870,000
2014 935,000
2015 845,000
2016 760,000
  4,200,000

Table (1)

Total direct labor cost, (2012 – 2016) is computed as below:

Direct labor cost Amount ($)
2012 3,885,000
2013 4,410,000
2014 4,620,000
2015 4,200,000
2016 3,885,000
  21,000,000

Table (2)

Total machine hours, (2012 – 2016) is computed as follows:

Machine hours Hours
2012 93,000
2013 104,000
2014 111,000
2015 100,400
2016 91,600
  500,000

Table (3)

Explanation of Solution

The total factory overhead is calculated by totaling all year’s actual overhead incurred in production. There are two activity bases. One is direct labor cost and another is machine hours. The total direct labor cost is determined by adding all year’s direct labor cost incurred. The total machine hours spent is determined by adding all year’s machine hours.

Conclusion

The predetermined overhead rate for direct labor cost is 20% of direct labor cost and predetermined overhead rate for machine hours is$8.40 per machine hour.

(2)

To determine

The over- or under applied overhead based on two predetermined overhead rates.

(2)

Expert Solution
Check Mark

Answer to Problem 19.5CP

Actual Overhead ($) Applied Overhead ($) (Over-) underapplied ($)
(a) (b) (c) = (a) – (b)
2016 Direct Labor cost 790,000 777,000 (1) 13,000
Machine Hours 790,000 781,200 (6) 8,800
2015 Direct Labor cost 870,000 882,000 (2) (12,000)
Machine Hours 870,000 873,600 (7) (3,600)
2014 Direct Labor cost 935,000 924,000 (3) 11,000
Machine Hours 935,000 932,400 (8) 2,600
2013 Direct Labor cost 845,000 840,000 (4) 5,000
Machine Hours 845,000 843,360 (9) 1,640
2012 Direct Labor cost 760,000 777,000 (5) (17,000)
Machine Hours 760,000 769,440 (10) (9,440)

Table (4)

Working note:

The applied overhead for direct labor activity base is calculated as follows:

Applied overhead (Year 5)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$3,885,000×20%=$777,000 (1)

Applied overhead (Year 4)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,410,000×20%=$882,000 (2)

Applied overhead (Year 3)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,620,000×20%=$924,000 (3)

Applied overhead (Year 2)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$4,200,000×20%=$840,000 (4)

Applied overhead (Year 1)=[Direct labor cost × Predetermined overhead rate based on Direct labor cost]=$3,885,000×20%=$777,000 (5)

The applied overhead for machine hour’s activity base is calculated as follows:

Applied overhead (Year 5)=[Machine hours × Predetermined overhead rate based on machine hours]=93,000×$8.40=$781,200 (6)

Applied overhead (Year 4)=[Machine hours × Predetermined overhead rate based on machine hours]=104,000×$8.40=$873,600 (7)

Applied overhead (Year 3)=[Machine hours × Predetermined overhead rate based on machine hours]=111,000×$8.40=$932,400 (8)

Applied overhead (Year 2)=[Machine hours × Predetermined overhead rate based on machine hours]=100,400×$8.40=$843,360 (9)

Applied overhead (Year 1)=[Machine hours × Predetermined overhead rate based on machine hours]=91,600×$8.40=$769,440 (10)

Explanation of Solution

When actual overhead incurred is less than applied overhead, the overhead is said to be overapplied. Alternatively, when actual overhead incurred is greater than applied overhead, the overhead is said to be under applied.

(3)

To determine

To Discuss: In applying the best predetermined overhead rate as computed.

(3)

Expert Solution
Check Mark

Explanation of Solution

The best predetermined overhead rate is machine hours. The total overhead applied is based on both machine hours and direct labor cost. The over- or underapplied overhead ranges from $9,440 (Overapplied) to $8,800 (Underapplied) when the rates are based on machine hours. The over- or underapplied overhead ranges from $17,000 (Overapplied) to $13,000 (Underapplied) when the rates are based on machine hours.

When comparing both, we could see less fluctuation in under or over applied overhead based on predetermined overhead rate based on machine hours in the year by year basis.

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Students have asked these similar questions
As an assistant cost accountant for Firewall Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, JoJo Gunn, is concerned about the wide fluctuation in the amount of over- or underapplied overhead in recent years. An analysis of the company's operations and use of the current overhead rate (direct labor cost) has narrowed the possible alternative overhead bases to direct labor cost and machine hours. For the past five years, the following data have been gathered: ww mwwwww M M w Year 5 Year 4 Year 3 Year 2 Year 1 Actual overhead $ 790,000 $ 870,000 $ 935,000 $ 845,000 $ 760,000 Applied overhead 777,000 882,000 924,000 840,000 777,000 (Over-) underapplied overhead $ 13,000 $ (12,000) %24 $ 11,000 5,000 $ (17,000) Direct labor cost $3,885,000 $4,410,000 $4,620,000 $4,200,000 $3,885,000 Machine hours 93,000 104,000 111,000 100,400 91,600 8,49 840,000 1. Calculate a predetermined factory overhead rate for each…
As an assistant cost accountant for Mississippi Industries, you have been assigned to re- view the activity base for the predetermined factory overhead rate. The president, Tony Favre, has expressed concern that the over- or underapplied overhead has fluctuated excessively over the years. An analysis of the company's operations and use of the current overhead rate (direct labor cost) has narrowed the possible alternative overhead bases to direct labor cost and machine hours. For the past five years, the following data have been gathered: 2014 2013 2012 2011 2010 $ 790,000 777,000 $ 13,000 $ 870,000 $ 935,000 $ 760,000 777,000 $ (17,000) Actual overhead $ 845,000 Applied overhead (Over-) underapplied overhead 882,000 924,000 840,000 $ (12,000) $ 11,000 24 5,000 Direct labor cost $3,885,000 $4,410,000 $4,620,000 $4,200,000 $3,885,000 Machine hours 93,000 104,000 111,000 100,400 91,600
As an assistant cost accountant for Mississippi Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, Tony Favre, has expressed concern that the over- or underapplied overhead has fluctuated excessively over the years.An analysis of the company’s operations and use of the current overhead rate (direct labor cost) has narrowed the possible alternative overhead bases to direct labor cost and machine hours. For the past five years, the following data have been gathered: Attachment In teams:1. Calculate a predetermined factory overhead rate for each alternative base, assuming that rates would have been determined by relating the total amount of factory overhead for the past five years to the base.2. For each of the past five years, determine the over- or underapplied overhead based on the two predetermined overhead rates developed in part (1).3. Which predetermined overhead rate would you recommend? Discuss the basis for…

Chapter 19 Solutions

Working Papers, Chapters 1-17 for Warren/Reeve/Duchac's Accounting, 26th and Financial Accounting, 14th

Ch. 19 - Issuance of materials On April 6, Almerinda...Ch. 19 - Issuance of materials On August 4, Rothchild...Ch. 19 - Prob. 19.2APECh. 19 - Direct labor costs During August, Rothchild...Ch. 19 - Factory overhead costs During April, Almerinda...Ch. 19 - Factory overhead costs During August, Rothchild...Ch. 19 - Applying factory overhead Almerinda Company...Ch. 19 - Applying factory overhead Rothchild Company...Ch. 19 - Job costs At the end of April, Almerinda Company...Ch. 19 - Job costs At the end of August, Rothchild Company...Ch. 19 - Cost of goods sold Hosmer Company completed...Ch. 19 - Cost of goods sold Skeleton Company completed...Ch. 19 - Transactions in a job order cost system Five...Ch. 19 - Cost flow relationships The following information...Ch. 19 - Prob. 19.3EXCh. 19 - Entry for issuing materials Materials issued for...Ch. 19 - Entries for materials Eclectic Ergonomics Company...Ch. 19 - Prob. 19.6EXCh. 19 - Entry for factory labor costs The weekly time...Ch. 19 - Entries for direct labor and factory overhead Dash...Ch. 19 - Factory overhead rates, entries, and account...Ch. 19 - Predetermined factory overhead rate Spring Street...Ch. 19 - Predetermined factory overhead rate Poehling...Ch. 19 - Entry for jobs completed; cost of unfinished jobs...Ch. 19 - Entries for factory costs and jobs completed Old...Ch. 19 - Financial statements of a manufacturing firm The...Ch. 19 - Decision making with job order costs Alvarez...Ch. 19 - Decision making with job order costs Raneri...Ch. 19 - Job order cost accounting for a Service company...Ch. 19 - Job order cost accounting for a service company...Ch. 19 - Entries for costs in a job order cost system...Ch. 19 - Entries and schedules for unfinished jobs and...Ch. 19 - Job order cost sheet Remnant Carpet Company sells...Ch. 19 - Analyzing manufacturing cost accounts Fire Rock...Ch. 19 - Prob. 19.5APRCh. 19 - Entries for costs in a job order cost system Royal...Ch. 19 - Entries and schedules for unfinished Jobs and...Ch. 19 - Job order cost sheet Stretch and Trim Carpet...Ch. 19 - Analyzing manufacturing cost accounts Clapton...Ch. 19 - Prob. 19.5BPRCh. 19 - Managerial analysis The controller of the plant of...Ch. 19 - Job order decision making and rate deficiencies...Ch. 19 - Factory overhead rate Salvo Inc., a specialized...Ch. 19 - Prob. 19.4CPCh. 19 - Prob. 19.5CP
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