Question

Trex by Rex produces back packs and fanny packs for the outdoors enthusiast. Production costs include direct materials, direct labor, and manufacturing overhead – both fixed and variable. The following costs were budgeted for the year:

Fixed manufacturing overhead	$187,200
Variable manufacturing overhead	$1.10/direct labor hour
Fixed selling and administration	$375,000

The back packs are expected to require 2.5 direct labor hours and planned production is 12,000 units. The fanny packs are expected to require 1.8 direct labor hours and planned production is 18,000 units.

The actual direct labor hours required in production for the year were as follows:

Product	Direct Labor Hours Used
Back packs	34,060 DL hours
Fanny Packs	16,250 DL hours

Overhead is applied to production using direct labor hours and the actual manufacturing cost for the year was $270,500.

Calculate the manufacturing overhead rate used to apply overhead to production of both the back packs and the fanny packs. What is the resulting over- or under-absorbed overhead for the year?

Explain what the over- or under-absorbed overhead represents and how it will be handled in the determination of the final costs of the products.

Show your work for any calculations and written analysis.

Answer 1

Total estimated hours
(12000*2.5)+(18000*1.8)	62400
Budegetd fixed manufacturing overhead rate per hour
187200/62400	3.0
ans 1
Budgeted manufacturing rate per hour
$3+1.1	$4.10	per hour	ans 1
ans 2
Actual Manufacturing overhead		$270,500
Applied overhead		206271
(34060+16250)*4.1
Underapplied		$64,229	ans 2
ans 3
Under absorbed overhead represents that the overhead
appled to the production was less than the actual overhead
cost incurred, this in turn decreases the cost of the packs
So one way to charge it to the final cost is to charge it to
Cost of good sold. Hence cost of good sold will be debited
by $64229. Other way is to charge it to WIP, finished goods
inventory and cost of good sold proportianately