Question

accounts for the year end of 2019. For allocating the manufacturing overhead (i.e., indirect cost pool) Company Beta uses the direct machine-hours (i.e., cost-allocation base). The budgeted indirect manufacturing costs for the company for the year of 2019 was $1,200,000 and the production budget was of 22,000,000 yo-yos with 550,000 machine-hours. During 2019 the company has allocated the indirect manufacturing costs based on its budget, however, by the year end of 2019, the actual indirect manufacturing costs was $1,300,000 and the actual production was 20,000,000 yo-yos with 500,000 machine-hours.

Required:

1. Identify whether there was an underallocation or an overallocation of indirect costs for 2019, and, if so, how much was this underallocation or overallocation of indirect costs.

Answer 1

Budgeted Indirect Manufacturing Costs = $1,200,000

Budgeted Machine Hours = 550,000 hours

Pre-determined Indirect Cost per machine hour

= Budgeted Indirect Manufacturing Costs / Budgeted Machine Hours

= $1,200,000 / 550,000

= $2.1818 per hour

Indirect Costs allocated = Pre-determined rate * actual machine hours

= $2.1818 * 500,000

= $1,090,909

Actual Indirect Costs = $1,300,000

Since Allocated Indirect Costs is less than the actual Indirect Costs, we cn say that there is underallocation of Indirect Costs.

Underallocation of Indirect Costs

= Actual Indirect Costs - Allocated Indirect Costs

= $1,300,000 - $1,090,909

= $209,091