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Chapter 3 Sol 11-20

The document contains examples of calculating variable and fixed overhead rates for manufacturing operations. It discusses applying overhead to production using predetermined overhead rates and calculating under or overapplied overhead. It also provides examples of prorating overhead balances to inventory accounts when overhead is over or underapplied.

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111 views4 pages

Chapter 3 Sol 11-20

The document contains examples of calculating variable and fixed overhead rates for manufacturing operations. It discusses applying overhead to production using predetermined overhead rates and calculating under or overapplied overhead. It also provides examples of prorating overhead balances to inventory accounts when overhead is over or underapplied.

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Something Chic
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Exercises

14. a. (1) At any level, the variable cost is $4 per machine hour. Since two
hours are needed to make one unit, the variable rate is $8 per
unit. At production of 10,000 units, the fixed rate is $325,000 ÷
10,000 or $32.50 per unit.

(2) At any level, the variable cost is $4 per machine hour. At


production of 10,000 units, the fixed rate per machine hour =
$32.50 ÷ 2 = $16.25 per machine hour.

b. (1) Combined rate = $8 + $32.50 = $40.50 per unit.

(2) Combined rate - $4 + $16.25 = $20.25 per unit.

c. At actual production of 11,000 units and applying OH on units of


production:

Expected = Actual Applied Under/Overapp.


VOH (11,000 x $8) $88,000 (11,000 x $ 8) = $ 88,000 $ 0
FOH 325,000 (11,000 x$32.50) = 357,500 32,500 overapp.

11. a. Applied VOH = 900 x $8 = $7,200

b. Applied FOH = 900 x $32.50 = $29,250

c. VOH: Actual VOH – Applied VOH = $7,000 - $7,200 = $200 overapplied


FOH: Actual FOH – Applied FOH = $27,000 - $29,250 = $2,250
overapplied

12. a. Expected overhead = ($42,900 x 12) + ($6 x 156,000)


= $514,800 + $936,000
= $1,450,800

Predetermined overhead rate = $1,450,800 ÷ 156,000 = $9.30 per DL hour

Overhead per unit = $9.30 x 3 hours per unit = $27.90

b. Manufacturing Overhead 128,550


Various Accounts 128,550

Work in Process Inventory (12,780 x $9.30) 118,854


Manufacturing Overhead 118,854

c. 12,780 DL hours ÷ 3 = 4,260 units should have been produced

13. a. Jan: $360,000 x 1.25 = $450,000


Feb: $330,000 x 1.25 = $412,500
Mar: $340,000 x 1.25 = $425,000

b. Jan : Actual – Applied = $440,000 - $450,000 = $10,000 overapplied


Feb: Actual – Applied = $420,400 - $412,500 = $ 7,900 underapplied
Mar: Actual – Applied = $421,000 - $425,000 = $ 4,000 overapplied

16. a. ($300,200 + $99,800) ÷ (5,000 + 20,000) = $400,000 ÷ 25,000 = $16.00 DLH

b. ($300,200 + $99,800) ÷ (38,000 + 2,000) = $400,000 ÷ 40,000 = $10.00 MH

c. Assembly: $300,200 ÷ 38,000 = $7.90 MH


Finishing: $99,800 ÷ 20,000 = $4.99 DLH

d. Overhead assigned using answer from part (a): 1 x $16.00 = $16.00


Overhead assigned using answer from part (b): 5 x $10.00 = $50.00
Overhead assigned using answer from part (c): (5 x $7.90) + (1 x $4.99)
= $39.50 + $4.99 = $44.49

17. a. Manufacturing Overhead 33,000


Cost of Goods Sold 33,000

b. Manufacturing overhead 33,000


Work in Process Inventory 10,560
Finished Goods Inventory 2,640
Cost of Goods Sold 19,800

WIP $192,000 192,000 ÷ 600,000 = 32% .32 x $33,000 = $10,560


FG 48,000 48,000 ÷ 600,000 = 8% .08 x $33,000 = 2,640
CGS 360,000 360,000 ÷ 600,000 = 60% .60 x $33,000 = 19,800
Total $600,000

c. The method in part (b) would be more appropriate in this instance


because of the magnitude of the amount of overapplied overhead. It is
5.5 percent of the total balances in all of the accounts containing
overhead, so to close it directly to cost of goods sold would cause a
distortion of the costs remaining in inventory.

15. a. Predetermined overhead rate = applied overhead ÷ actual DL hours


= $60,000 ÷ 5,000 = $12.00 per DL hour

b. Overhead is underapplied by $750 = $60,750 - $60,000

c. Because the amount of underapplied overhead is only about .5% of total


production costs for the month, the underapplied balance could be
closed only to Cost of Goods Sold without distorting product costs.
The journal entry would be as follows:
Cost of Goods Sold 750
Manufacturing overhead 750

21. a. Using the information in the WIP account, the rate is $40,000 ÷ $20,000
or 200% of direct labor cost.

b. The amount ($40,000) should be prorated because it is very large


relative to the balances in Work in Process Inventory, Finished Goods
Inventory and Cost of Goods Sold.

c. Work in Process Inventory : $40,000 x ($100,000 ÷ $570,000) = $ 7,018


Finished Goods Inventory: $40,000 x ($200,000 ÷ $570,000) = 14,035
Cost of Goods Sold: $40,000 x ($270,000 ÷ $570,000) = 18,947
Total $40,000

e. A debit balance in the manufacturing overhead account can be the


result of several causes including: (1) paying higher prices than
budgeted for the resources comprising actual overhead, (2) using more
overhead resources than attached to inventory for actual output, (3)
producing at less capacity than the planned level of activity upon which
the predetermined overhead rate was based, or (4) a combination of the
prior three causes.

20. a. The choice of capacity measure affects the amount of under- or


overapplied overhead only for fixed overhead costs. Because the total
amount of overhead that is expected to be incurred is unaffected by the
volume of production (as long as production is within the relevant
range), the per-unit cost of fixed overhead varies inversely with the level
of actual production. If the actual capacity differs dramatically from the
capacity chosen to allocate overhead, the result is likely to be large
amounts of under- or overapplied fixed overhead. If actual capacity is
significantly below (above) the capacity used to develop the fixed
overhead rate, the result is likely to be a significant amount of
underapplied (overapplied) fixed overhead.

b. Expected capacity would likely result in the least amount of under- or


overapplied overhead because expected capacity reflects the most
likely level of capacity utilization for 2008.

c. If Rydex is in a cyclical industry, it might choose normal capacity to


allocate overhead costs. Normal capacity is based on a consideration
of long-term activity that can accommodate an entire cycle in an
industry. The annual capacity reflects the average of the long-term
activity level.
19. a. VOH rate (can be calculated at either level): $625,000 ÷ 100,000 MHs =
$6.25 per MH or $937,500 ÷ 150,000 MHs = $6.25 per MH

b. FOH rate: $720,000 ÷ 180,000 = $4.00 per MH

c. Expected capacity = 2/3 x 180,000 = 120,000 MHs


FOH rate: $720,000 ÷ 120,000 = $6.00 per MH

d. At 110,000 MHs:
Total VOH applied = 110,000 x $6.25 = $687,500
Total FOH applied (practical capacity rate): 110,000 x $4.00 = $440,000
Total FOH applied (expected capacity rate): 110,000 x $6.00 = $660,000

Total OH applied (practical) ($687,500 + $440,000) $1,127,500


Actual OH (1,360,000)
Underapplied OH $ (232,500)

Total OH applied (expected) ($687,500 + $660,000) $1,347,500


Actual OH (1,360,000)
Underapplied OH $ (12,500)

18. a. MHs Total Cost = Variable Cost + Fixed Cost


High activity 34,000 $ 6,100 $2,720 $3,380
Low activity 31,000 5,860 2,480 3,380
Differences 3,000 $ 240

Variable rate = $240 ÷ 3,000 MHs = $0.08 per MH

High activity variable cost = 34,000 x $0.08 = $2,720


Low activity variable cost = 31,000 x $0.08 = $2,480

Fixed cost at high activity = $6,100 - $2,720 = $3,380


Fixed cost at low activity = $5,860 - $2,480 = $3,380

Budget formula: TC = FC + VC(X)


TC = $3,380 + $0.08 MH

f. TC = $3,380 + $0.08(33,175) = $3,380 + $2,654 = $6,034

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