Question

The Gilster Company, a machine tooling firm, has several plants. One plant, located in St. Falls, Minnesota, uses a job order costing system for its batch production processes. The St. Falls plant has two departments through which most jobs pass. Plantwide overhead, which includes the plant manager’s salary, accounting personnel, cafeteria, and human resources, is budgeted at $200,000. During the past year, actual plantwide overhead was $185,000. Each department’s overhead consists primarily of depreciation and other machine-related expenses. Selected budgeted and actual data from the St. Falls plant for the past year are as follows.

	Department A				Department B
Budgeted department overhead
(excludes plantwide overhead)	$	196,000			$	559,000
Actual department overhead		142,000				574,000
Expected total activity:
Direct labor hours		36,000				10,000
Machine-hours		14,000				43,000
Actual activity:
Direct labor hours		38,500				9,400
Machine-hours		14,500				45,000

For the coming year, the accountants at St. Falls are in the process of helping the sales force create bids for several jobs. Projected data pertaining only to job no. 110 are as follows.

Direct materials	$	16,500
Direct labor cost:
Department A (2,000 hr)		30,000
Department B (500 hr)		10,000
Machine-hours projected:
Department A		140
Department B		1,200
Units produced		10,000

d. Compute the under- or overapplied overhead for the St. Falls plant for the year.

Answer 1

Answer

d.

Applied overhead using machine hours:
Plantwide {$3.51* × 59500 (14,500 + 45000) mach. hrs.} ……………	$208845
Dept. A ($14# × 14,500 mach. hrs.) ………………………	203000
Dept. B ($13 @× 45000 mach. hrs.) …………………………	585000
Total overhead applied ……………………………	$996845

Actual overhead was $901000 ($185000 + $142000 + $574000), so the amount overapplied was $95845 ($996845 - $901000). Correcting the over application by reducing cost of goods sold would increase net income for the current year by more than would have resulted if the correction was prorated between cost of goods sold and inventories.

* overhead rate using machine hours = $200000/(14000+43000) machine hrs =$3.51 estimted machine hr

# overhead rate A = $ 196000/14000 hrs = $14

@ overhead rate B $559000/43000 hrs = $13