The following calendar year information about the Tahoma Corporation is availabl

Question

The following calendar year information about the Tahoma Corporation is available on December 31:

Advertisng Expense: $28,800

Depreciation of factory equipment: 42,320

Depreciation of office equipment: 10,800

Direct Labor: 142,600

Factory Utilities: 35,650

Interest Expense: 6,650

Inventories, January 1: Raw Materials: 3,450 Goods in process: 17,250 Finished Goods: 35,650 Inventories, December 31 Raw materials: 2,300 Goods in Process: 20,700 Finished Goods: 31,050 Raw Materials Purchases: 132,450 Rent on factory building: 41,400 Indirect Labor:51,750 Sales Commissions: 16,500

The company applies overhead on the basis of 125% of direct labor costs. 1.

Calculate the amount of over- or under-applied overhead.

CONCENTRATE ON THIS QUESTION PLEASE: What is the significance of this over- or under-applied amount of overhead?

Explanation / Answer

Calculation of Over / Under Appied overhead:

Actual Overhead:

Depreciation of factory equipment

$          42,320

Factory Utilities

$          35,650

Rent on factory building

$          41,400

Indirect Labor

$          51,750

Total Actual Overhead

$        171,120

Applied Overhead :

(125% of direct labor costs) = 125% *142600 =

$        178,250

OverApplied Overhead = Applied overhead - Actual Overhead = 178250 - 171120 =

$            7,130

Significance of this over-applied amount of overhead:

Overapplied overhead means the applied overhead is more than the actual overhead incurred. This will increase the cost of goods sold and that will resilt is higer profits. So overapplied overhead amount is to be deducted from the cost of goods sold.

Calculation of Over / Under Appied overhead:

Actual Overhead:

Depreciation of factory equipment

$          42,320

Factory Utilities

$          35,650

Rent on factory building

$          41,400

Indirect Labor

$          51,750

Total Actual Overhead

$        171,120

Applied Overhead :

(125% of direct labor costs) = 125% *142600 =

$        178,250

OverApplied Overhead = Applied overhead - Actual Overhead = 178250 - 171120 =

$            7,130

Significance of this over-applied amount of overhead:

Overapplied overhead means the applied overhead is more than the actual overhead incurred. This will increase the cost of goods sold and that will resilt is higer profits. So overapplied overhead amount is to be deducted from the cost of goods sold.

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