PNG Corporation designs and builds roller coasters for amusement parks. At the e
ID: 2509670 • Letter: P
Question
PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20x1, managers estimated overhead costs for 20x2 of $150,000 based on expected production of 5 roller coasters using 5,000 labour hours each. Actual overhead costs for 20x2 were $170,000. PNG actually designed and built 6 roller coasters with the following direct labour usage and overhead costs:
Assume PNG uses a normal costing system with the number of labor hours as the overhead allocation base.
a) How much overhead would be allocated to each job?
b) Calculate the total over- or underapplied overhead (specify which) for each job.
Explanation / Answer
a.
Calculate the predetermined overhead rate as follows:
Predetermined overhead rate
= Estimated overhead cost/Estimated labor hours
= $150,000/(5 x 5,000)
= $6 per direct labor hour
Calculate the amount of overhead cost allocated to each job by multiplying the predetermined overhead rate by the number of direct labor hours used by each job.
Overhead cost allocated to The Big Dipper = $6 x 3,500 = $21,000
Overhead cost allocated to The Ultimate Scream = $6 x 4,000 = $24,000
Overhead cost allocated to Loop Me = $6 x 5,000 = $30,000
Overhead cost allocated to The Screaming Chicken = $6 x 2,500 = $15,000
Overhead cost allocated to You Don't Know Coasters = $6 x 6,000 = $36,000
Overhead cost allocated to Old Faithful = $6 x 4,500 = $27,000
b.
Calculate the over- or underapplied overhead as follows:
Total overhead cost allocated to all jobs
= $21,000 + $24,000 + $30,000 + $15,000 + $36,000 + $27,000
= $153,000
Actual overhead cost incurred
= $28,000 + $35,000 + $27,000 + $40,000 + $25,000 + $15,000
= $170,000
Since actual overhead cost is greater than the amount of overhead cost allocated to all jobs, overhead is underapplied.
Underapplied overhead = $170,000 - $153,000 = $17,000
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