1) A firm estimates next year\'s total manufacturing overhead at $450,000. Four

Question

1) A firm estimates next year's total manufacturing overhead at $450,000. Four possible overhead bases are: 40,000 direct labor hours, $350,000 direct labor dollars, 2,300 machine hours, and $200,000 of raw material costs. At the end of the year, the actual amounts were: $460,000 overhead, 41,000 direct labor hours, $340,000 direct labor cost, 2,600 machine hours, and $190,000 of raw material costs.

a) calculate the 4 overhead rates.

b) By using the four different overhead rates, calculate overhead applied by each rate.

c) For each overhead rate, calculate the over or under applied overhead at year end.

Explanation / Answer

a) Overhead based on direct labor hours = 450,000/40000=$11.25 per direct labor hour

Overhead based on direct labor dollars = 450,000/350,000=$1.29 per direct labor dollar

Overhead based on machine hours = 450,000/2300=$195.65 per machine hour

Overhead based onraw material costs = 450,000/200,000=$2.25 per raw material cost

b) Overhead applied by direct labor hours = $11.25*41000 =$461,250

Overhead applied by direct labor dollars = $1.29*340000 =$437,142.86

Overhead applied by machine hours = $195.65*2600 =$508,695.65

Overhead applied by raw material costs =$2.25*190000 =$427500

c) Overhead over applied by direct labor hours =$461,250-$460,000 = $1250

Overhead under applied by direct labor dollars = $460,000-$437,142.86 =$22,857.14

Overhead over applied by machine hours = $508,695.65-$460,000=$48695.65

Overhead under applied by raw material costs =$460,000-$427500=$32,500

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