Donald Aeronautics Company uses a budgeted overhead rate in applying overhead to

Question

Donald Aeronautics Company uses a budgeted overhead rate in applying overhead to products on a
machine-hour basis for Department A and on a direct-labor-hour basis for Department B. At the
beginning of 20X7, the company’s management made the following budget predictions:
Department A Department B
Direct-labor cost $1,500,000 $1,200,000
Factory overhead $1,820,000 $1,000,000
Direct-labor hours 90,000 125,000
Machine hours 350,000 20,000

Cost records of recent months show the following accumulations for product M89:
Department A Department B
Material placed in production $12,000 $32,000
Direct-labor cost $10,800 $10,000
Direct-labor hours 900 1,250
Machine hours 3,500 150
1. What is the budgeted overhead rate that should be applied in Department A? In Department B?
2. What is the total overhead cost of product M89?
3. If 120 units of product M89 are produced, what is their unit cost?
4. At the end of 20X7, actual results for the year’s operations were as follows:
Department A Department B
Actual overhead costs incurred $1,300,000 $1,200,000
Actual direct-labor hours 80,000 120,000
Actual machine hours 300,000 25,000
Find the underapplied or overapplied overhead for each department and for the factory as a whole.

Explanation / Answer

1. What is the budgeted overhead rate that should be applied in Department A? In Department B?

Department A (Based on machine hours)
= $1,820,000 / 350,000 = $5.20 Per machine hour

Department B (Based on Direct labor hours)
= $1,000,000 / 125,000 = $8.00 per DLH

2. What is the total overhead cost of product M89?
                                   Dept. A         Dept. B     Total
3,500 x $5.20               $18,200            -           $18,200
1,250 x $8.00                    -            $10,000      $10,000
Total Overhead Cost
of Product M89             $18,200       $10,000     $28,200

3. If 120 units of product M89 are produced, what is their unit cost?
    Direct materials   ($12,000 + $32,000)          $44,000
    Direct labor     ($10,800 + $10,000)              $20,800
    Overhead cost                                             $28,200
    Total cost                                                   $93,000
     Units produced                                              120 units
     Unit cost ($93,000 / 120)                           $775

4. Find the underapplied or overapplied overhead for each department and for the factory as a whole.
                                                      Dept. A         Dept. B
    Actual Overhead cost incurred   $1,300,000     $1,200,000
    Applied overhead
     300,000 x $5.20                      $1,560,000           -
     120,000 x $8.00                                               $960,000
                                            ____________________________
(Over)/Under applied                ($260,000)         $240,000
Factory as a whole                                     $20,000
                                            ============================

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