Chapter 11, Problem 7ESB

a.

To determine

The predetermined overhead rate of Company B and Company H.

Explanation of Solution

Predetermined overhead rate: It is an expected proportion of overhead costs recognized before an accounting period that depends on an alternative variable and used to distribute costs during the production procedure.

Determine the predetermined overhead rate for Company B

$\begin{array}{c}\mathrm{Pr}e\det er\min edOverheadRate=\left[\frac{TotalOverhead\mathrm{Cos}ts}{EstimatedMachineHours}\right]\\ =\left[\frac{\$\text{72,000}}{12,000}\right]\\ =\$6permachinehour\end{array}$

Therefore, the predetermined overhead rate for Company B is $6 per machine hours.

Determine the predetermined overhead rate for Company H

$\begin{array}{c}\mathrm{Pr}e\det er\min edOverheadRate=\left[\frac{TotalOverhead\mathrm{Cos}ts}{EstimatedMachineHours}\right]\\ =\left[\frac{\$\text{160,000}}{20,000}\right]\\ =\$8permachinehour\end{array}$

Therefore, the predetermined overhead rate for Company H is $8 per machine hours.

b.

To determine

The amount of overhead cost applied to work in progress.

Explanation of Solution

Determine the amount of overhead cost for Company B

$\begin{array}{c}AmountofOverhead\mathrm{Cos}t=\left[\begin{array}{l}\mathrm{Pr}e\det er\min edOverheadRate\times \\ ActualDirectLabor\mathrm{Cos}t\end{array}\right]\\ =\left[\$6\times 12,300\right]\\ =\$\text{73,800}\end{array}$

Therefore the amount of overhead cost for Company B is $73,800.

Determine the amount of overhead cost for Company H

$\begin{array}{c}AmountofOverhead\mathrm{Cos}t=\left[\begin{array}{l}\mathrm{Pr}e\det er\min edOverheadRate\times \\ ActualDirectLabor\mathrm{Cos}t\end{array}\right]\\ =\left[\$8\times 19,500\right]\\ =\$\text{156,000}\end{array}$

Therefore the amount of overhead cost for Company H is $156,000.

To determine

The amount of over-applied or under-applied manufacturing overhead cost.

Explanation of Solution

With the actual overhead cost is $71,900 and the applied overhead cost is $73,800, Company B’s manufacturing overhead is over-applied. Since the applied overhead cost is higher than the actual overhead cost. There is a difference of $1,900 ($73,800-$71,900).

With the actual overhead cost is $159,000 and the applied overhead cost is $156,000, Company H’s manufacturing overhead is under-applied. Since the applied overhead cost is lower than the actual overhead cost. There is a difference of $3,000 lesser. ($159,000-$156,000).

Therefore, Company B is over-applied by $1,900 and Company H is under-applied by $3,000.

c.

To determine

Closing the manufacturing overhead account that will have an effect the cost of goods sold of each company.

Explanation of Solution

The following is the way to close the manufacturing overhead account that will have an effect on the cost of goods sold of each company:

• From the results obtained above, Company B's overhead was over-applied, an excessive amount of expense was made to cost of goods sold. The entry to close the manufacturing overhead account will address this situation by diminishing the amount of cost of goods sold.
• From the results obtained above, Company H’s overhead was under-applied, lesser expense was made to cost of goods sold. The entry to close the manufacturing overhead account will address this situation by expanding the amount of cost of goods sold.