Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 36

Overhead Rate, Pricing

Norton Associates is an advertising agency in Austin, Texas. The company’s controller estimated that it would incur $325,000 in overhead costs for 2010. Because the overhead costs of each project change in direct proportion to the amount of direct professional hours incurred, the controller decided that overhead should be applied on the basis of professional hours. The controller estimated 25,000 professional hours for the year. During October, Norton incurred the following costs to make a 20-second TV commercial for Central Texas Bank:

Direct materials	$32,000
Direct professional hours ($50/hour)	1,200

Actual overhead costs to make the commercial totaled $16,500. The industry customarily bills customers at 150 percent of total cost.

Required

1. Compute the predetermined overhead rate.

2. What is the total amount of the bill that Norton will send Central Texas Bank?

Step 1 of 3

Overapplied overhead is the case when the applied factory overhead cost is greater than the actual factory overhead cost. Underapplied overhead is the case when the applied factory overhead cost is lesser than the actual factory overhead cost.