Allocation of manufacturing overhead
In manufacturing company, there are various manufacturing overhead incurred to produce the goods these overhead expenses are then allocated to the respective manufacturing department. There are two traditional ways in which company allocates the manufacturing overhead to department. They are plant wide overhead and departmental overhead rate. These rates are determined based on estimated manufacturing overhead and estimated direct labor hours or machine hours.
Overhead rate is calculated at beginning of the year which is used to determine the amount of overhead to be applied to work in progress inventory.
Formula to calculate overhead rate
Calculate budgeted volume last year as follows:
Calculate budgeted volume last year using excel spreadsheet as follows:
Thus, budgeted volume last year is
Budgeted volume means the quantity planned either to produce or sell for a given particular period. Volume expected for the coming year or the long run average volumes are the two ways to estimate the budgeted volume.
Calculate the budgeted volume amount (in screen square inches) as shown below:
The over applied refers to excess absorption of overheads. Therefore the actual overheads are less than the applied overheads. Therefore, to get the budgeted overheads the over applied should be added to the actual overheads.
Thus, the budgeted volume amount (in sq. in) is
It refers to any activity which is undertaken by the entity for selling its products or rendering its services in the market in exchange for money. Sales can be made on two basis that is cash or credit basis.
The amount of sales is shown in the profit and loss statement of the entity as income of such entity.
Working capital is that part of the capital that is introduced in the business in order to run the day to day activities of the business. It is basically the difference between the current assets and the current liabilities that are used in the business.
a.In the present case, the amount of sales, the profit before taxes and the value of the loan is provided.The footnote presented by the person will have an adverse impact on the chance for renewal of the loan amount because the amount of overhead was not shown as a part of production costs and hence the amount of income of the company was shown on a higher side.
Calculate the amount to be allocated to cost of goods sold using below equation as follows:
Hence amount allocated to COGS is $154,000 out of $462,000.
Calculate the amount unallocated using below equation as follows:
Hence the unallocated overhead amounts to $308,000.
After the examination of the amounts and the amount of overheads, the net income of the company was correctly stated at $625,000 by reducing the income by $154,000. The company is still left with $308,000 of unabsorbed overheads and if they are used in the production then such overheads can reduce the income levels as well.
b.The following question should have been asked which are as follows:
1. What is the reason behind the amount of unabsorbed overhead being higher than the amount of expenses expected or they are lesser than the amount of volumes which were expected by the company?
2. What is the reason behind the company has written off the entire amount of unabsorbed overheads in a single shot.