Weiters Company produces uniforms. The company allocates manufacturing overhead

Question

Weiters Company produces uniforms. The company allocates manufacturing overhead based on the machine hours each job uses. Weiters Company reports the following data for the past year: Compute the predetermined manufacturing overhead rate. Calculate the allocated manufacturing overhead for the past year. Compute the underallocated or overallocated manufacturing overhead. How will this underallocated or overallocated manufacturing overhead be disposed of? How can managers use accounting information to help control manufacturing overhead costs?

Explanation / Answer

Pre Det Mfg OH rate = Total Budgeted Mfg OH/Budgeted MHs Budgeted Mfg OH is : Indirect Mat 48500 Dep on P&E 64500 Ind Mfg Lab 39000 Plant Util 28700 --------------------- Bud Mfg OH $180,700 Bud MHr 6,950 So Bud Mfg OH rate = $180,700/6950 = $26 .....Ans (1) Allocated Mfg OHs = Actual MCHrs * Budgeted Rate = 6600*$26 = 171,600 .....Ans (2) SO Underallocated OHs = Budheted - Actual = 180700 - 171600 = $9,100 These Underallocated OHs are disposed off in two ways namely :- A. Closed out to cost of goods sold. B. Allocated between work in process (WIP), finished goods and cost of goods sold in proportion to the overhead applied during the current period in the ending balances of these account. The second method, which allocates the under or overapplied overhead among ending inventories and cost of goods sold is equivalent to using an "actual" overhead rate and is for that reason considered by many to be more accurate than the first method. Consequently, if the amount of underapplied or overapplied overhead is material, many accountants would insist that the second method be used. Ans..(3) 4. (a) Managers would like to know the accounting system's valuation of completed jobs before the end of the accounting period. Suppose, for example a company waits until the end of the year to compute its overhead rate. Then there would be no way for managers to know the cost of goods sold for a job until the close of the year. The job may be completed and shipped before the end of the year. The seriousness of this problem can be reduced to some extent by computing the actual overhead more frequently, but that immediately leads to another problem as discussed below. (b) If actual overhead rates are computed frequently, seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rates. Managers generally feel that such fluctuations in overhead rates and costs serve no useful purpose and are misleading. (c) The use of predetermined overhead rate simplifies the record keeping. To determine the overhead cost to apply t a job, the accounting staff simply multiplies the direct labor hours recorded for the job by the predetermined overhead rate

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