Question

Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead.

(LO 3, 5), AP

Agassi Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department D, direct labor hours in Department E, and machine hours in Department K. In establishing the predetermined overhead rates for 2017, the following estimates were made for the year.

Department

	D	E	K
Manufacturing overhead	$1,200,000	$1,500,000	$900,000
Direct labor costs	$1,500,000	$1,250,000	$450,000
Direct labor hours	100,000	125,000	40,000
Machine hours	400,000	500,000	120,000

During January, the job cost sheets showed the following costs and production data.

	D	E	K
Direct materials used	$140,000	$126,000	$78,000
Direct labor costs	$120,000	$110,000	$37,500
Manufacturing overhead incurred	$ 99,000	$124,000	$79,000
Direct labor hours	8,000	11,000	3,500
Machine hours	34,000	45,000	10,400

Instructions

(a) Compute the predetermined overhead rate for each department.

(a) 80%, $12, $7.50

(b) Compute the total manufacturing costs assigned to jobs in January in each department.

(b) $356,000, $368,000, $193,500 (c) Compute the under- or over applied overhead for each department at January 31.

(c) $3,000, $(8,000), $1,000

Answer 1

a.

Predetermined overhead rate = Estimated manufacturing overhead / Estimated activity

Department D = $1,200,000 / $1,500,000 = 0.8 or 80% of direct labor cost

Department E = $1,500,000 / 125,000 = $12 per direct labor hour

Department K = $900,000 / 120,000 = $7.5 per machine hour

b.

	D	E	K
Direct material	$140,000	$126,000	$78,000
Direct labor	120,000	110,000	37,500
Manufacturing overhead applied	96,000 (120,000*80%)	132,000 (11,000*$12)	78,000 (10,400*$7.5)
Total manufacturing costs	$356,000	$368,000	$193,500

c.

Under or overapplied overhead = Actual manufacturing overhead - Applied manufacturing overhead

Department D = $99,000 - 96,000 = $3,000 Underapplied

Department E = $124,000 - 132,000 = $8,000 Overapplied

Department K = $79,000 - 78,000 = $1,000 Underapplied