Natural Cosmetics Company applies overhead costs on the basis of machine hours.

Question

Natural Cosmetics Company applies overhead costs on the basis of machine hours.
The overhead rate is computed by analyzing data from the previous year to determine the percentage change in costs.
Thus, this year's overhead rate will be based on the percentage change multiplied by last year's costs.

Last Year
Machine hours 57, 360
Overhead costs
Indirect Labor $23,530.00
Employee Benefits $28,600.00
Manufacturing Supervision $18,480.00
Utilities $14,490.00
Factory Insurance $7,800.00
Janitorial Services $12,100.00
Depreciation-factory $21,300.00
Misc Overhead $7,475.00
$133,775.00

This year the cost of utilities is expected to increase by 40% over the previous year; the cost of indirect labor, employee benefits, and misc overhead
is expected to increase by 30% over the previous year; the cost of insurance and depreciation is expected to increase by 20% over the previous year
and the cost of supervision and janatorial services is expected to increase by 10% over the previous year. Machine hours are expected to total 68,832.

Required
1. Compute the projected costs and the overhead rate for this year, using the information about expected cost increases.
(Carry your answer to three decimal places).
2. Jobs completed during this year and the machine hours used were as follows:
Job no. Machine hrs.
2214 12,300
2215 14,200
2216 9,800
2217 13,600
2218 11,300
2219 8,100
Determine the amount of overhead to be applied to each job and to total production during this year. (round answers to whole dollars)
3. Actual overhead costs for this year were $165,845. Was overhead under-applied or over-applied? By how much? Should the Cost of
Goods Sold account be increased or decreased to reflect actual overhead costs?

Explanation / Answer

Overhead costs
Indirect Labor                    $23,530 x 1.30        $30,589.00
Employee Benefits              $28,600 x 1.30        $37,180.00
Manufacturing Supervision $18,480 x 1.10        $20,328.00
Utilities                             $14,490 x 1.40         $20,286.00
Factory Insurance                $7,800 x 1.20           $9,360.00
Janitorial Services             $12,100 x 1.10         $13,310.00
Depreciation-factory          $21,300 x 1.20         $25,560.00
Misc Overhead                    $7,475 x 1.30           $9,717.50
                                      $133,775                  $166,330.50
                                     =========               ============
Machine hours                  57,360                         68,832
Expected Overhead rate
for this year                                       $166,330.50 / 68,832
                                                                    =$2.416
_______________________________________________________

2. Jobs completed during this year and the machine hours used were as follows:
Determine the amount of overhead to be applied to each job and to total production during this year. (round answers to whole dollars)

Job no.     Machine hrs. Overhead Rate     Applied to job
2214         12,300              $2.416                  $29,717
2215         14,200              $2.416                  $34,307
2216           9,800              $2.416                  $23,677
2217         13,600              $2.416                  $32,858
2218        11,300              $2.416                  $27,301
2219          8,100               $2.416                 $19,570
Total Applied Applied Overhead cost        $167,430
                                                                 ==========

3. Actual overhead costs for this year were $165,845. Was overhead under-applied or over-applied? By how much? Should the Cost of Goods Sold account be increased or decreased to reflect actual overhead costs?

Over-Applied overhead cost     $167,430 - $165,845 = $1,585

Cost of Goods Sold should be decreased by $1,585 to reflect actual overhead costs.

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