Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 22

Analysis of Overhead Using a Predetermined Rate

UCD Company uses a job costing accounting system for its production costs. A predetermined overhead rate based on direct labor-hours is used to apply overhead to individual jobs. An estimate of overhead costs at different volumes was prepared for the current year as follows:

Direct labor-hours	30,000	40,000	50,000
Variable overhead costs	$360,000	$480,000	$ 600,000
Fixed overhead costs	500,000	500,000	500,000
Total overhead	$860,000	$980,000	$1,100,000

The expected volume is 40,000 direct labor-hours for the entire year. The following information is for October, when jobs 1011 and 1015 were completed.

Inventories, October 1
Raw materials and supplies	$ 42,000
Work in process (Job 1011)	91,300
Finished goods	227,900
Purchases of raw materials and supplies
Raw materials	629,000
Supplies	79,300
Materials and supplies requisitioned for production
Job 1011	281,000
Job 1015	234,500
Job 1017	47,200
Supplies	76,700
	$639,400
Machine-hours (MH)
Job 1011	6,200 MH
Job 1015	6,100 MH
Job 1017	3,700 MH
Direct labor-hours (DLH)
Job 1011	14,000 DLH
Job 1015	6,100 DLH
Job 1017	3,700 DLH
Labor costs
Direct labor wages (all hours @ $12)	$285,600
Indirect labor wages (12,000 hours)	63,000
Supervisory salaries	128,000
Building occupancy costs (heat, light, depreciation, etc.)
Factory facilities	36,900
Sales and administrative offices	14,200
Factory equipment costs
Power	21,800
Repairs and maintenance	8,200
Other	9,900
	$ 39,900

Required

Answer the following questions.

a. Compute the predetermined overhead rate (combined fixed and variable) to be used to apply overhead to individual jobs during the year.

(Note: Regardless of your answer to requirement [a], assume that the predetermined overhead rate is $25 per direct labor-hour. Use this amount in answering requirements [b] through [e].)

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b. Compute the total cost of Job 1011 when it is finished.

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c. How much of factory overhead cost was applied to Job 1017 during October?

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d. What total amount of overhead was applied to jobs during October?

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e. Compute actual factory overhead incurred during October.

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f. At the end of the year, UCD Company had the following account balances:

	Balance
Underapplied Overhead	$ 3,000,000
Cost of Goods Sold	28,000,000
Work-in-Process Inventory	4,000,000
Finished Goods Inventory	8,000,000

How would you recommend treating the Underapplied Overhead? Show the effect on the account balances in the following table.

Overapplied Overhead	____
Cost of Goods Sold	____
Work-in-Process Inventory	____
Finished Goods Inventory	____

Step 1 of 5

a.		$24.50 per DLH.		$980,000	= $24.50 per DLH
				40,000