Question

Garcia, Inc. uses a job-order costing system for its products, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company applies manufacturing overhead using machine hours in the Machining Department and direct-labor cost in the Assembly Department. The following information relates to the year just ended:

	Machining Department			Assembly Department
Budgeted manufacturing overhead	$	4,000,000		$	3,080,000
Actual manufacturing overhead		4,270,000			3,040,000
Budgeted direct-labor cost (based on practical capacity)		1,500,000			5,600,000
Actual direct-labor cost		1,450,000			5,780,000
Budgeted machine hours (based on practical capacity)		400,000			100,000
Actual machine hours		425,000			110,000

The data that follow pertain to job no. 775, the only job in production at year-end.

	Machining Department			Assembly Department
Direct material	$	24,500		$	6,800
Direct labor	$	27,800		$	58,700
Machine hours		360			150

Selling and administrative expense amounted to $2,500,000.

3. Determine whether overhead was under- or overapplied during the year in the Machining Department.

Garcia, Inc. uses a job-order costing system for its products, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company applies manufacturing overhead using machine hours in the Machining Department and direct-labor cost in the Assembly Department. The following information relates to the year just ended:

	Machining Department			Assembly Department
Budgeted manufacturing overhead	$	4,000,000		$	3,080,000
Actual manufacturing overhead		4,270,000			3,040,000
Budgeted direct-labor cost (based on practical capacity)		1,500,000			5,600,000
Actual direct-labor cost		1,450,000			5,780,000
Budgeted machine hours (based on practical capacity)		400,000			100,000
Actual machine hours		425,000			110,000

The data that follow pertain to job no. 775, the only job in production at year-end.

	Machining Department			Assembly Department
Direct material	$	24,500		$	6,800
Direct labor	$	27,800		$	58,700
Machine hours		360			150

Selling and administrative expense amounted to $2,500,000.

3. Determine whether overhead was under- or overapplied during the year in the Machining Department.

Answer 1

Solution 3:

Predetermined overhead rate of machining department = Budgeted manufacturing overhead of machining / Budgeted machine hours

= $4,000,000 / 400000 = $10 per machine hour

Manufacturing overhead applied in machining department = Actual machine hours * Predetermined overhead rate

= 425000 * $10 = $4,250,000

Actual manufacturing overhead in machining department = $4,270,000

As applied overhead during the year in the machining department is lower than actual manufacturing overhead incurred, it means overhead is underapplied in machining department.

Underapplied overhead = $4,270,000 - $4,250,000 = $20,000