
Concept explainers
(1)
Predetermined factory
Normally,
To Calculate: The predetermined factory overhead rate for each alternative base for M Industries.
(1)

Explanation of Solution
The predetermined overhead rate for alternative activity base is prepared as follows:
Direct labor cost:
Machine hours:
Working notes:
Total overhead for (2012 – 2016) is calculated as follows:
Factory Overhead (Actual) | Amount ($) |
2012 | 790,000 |
2013 | 870,000 |
2014 | 935,000 |
2015 | 845,000 |
2016 | 760,000 |
4,200,000 |
Table (1)
Total direct labor cost, (2012 – 2016) is computed as below:
Direct labor cost | Amount ($) |
2012 | 3,885,000 |
2013 | 4,410,000 |
2014 | 4,620,000 |
2015 | 4,200,000 |
2016 | 3,885,000 |
21,000,000 |
Table (2)
Total machine hours, (2012 – 2016) is computed as follows:
Machine hours | Hours |
2012 | 93,000 |
2013 | 104,000 |
2014 | 111,000 |
2015 | 100,400 |
2016 | 91,600 |
500,000 |
Table (3)
Explanation:
The total factory overhead is calculated by totaling all year’s actual overhead incurred in production. There are two activity bases. One is direct labor cost and another is machine hours. The total direct labor cost is determined by adding all year’s direct labor cost incurred. The total machine hours spent is determined by adding all year’s machine hours.
The predetermined overhead rate for direct labor cost is 20% of direct labor cost and predetermined overhead rate for machine hours is$8.40 per machine hour.
(2)
The over- or under applied overhead based on two predetermined overhead rates.
(2)

Explanation of Solution
Actual Overhead ($) | Applied Overhead ($) |
(Over-) underapplied ($) | ||
(a) | (b) | (c) = (a) – (b) | ||
2016 | Direct Labor cost | 790,000 | 777,000 (1) | 13,000 |
Machine Hours | 790,000 | 781,200 (6) | 8,800 | |
2015 | Direct Labor cost | 870,000 | 882,000 (2) | (12,000) |
Machine Hours | 870,000 | 873,600 (7) | (3,600) | |
2014 | Direct Labor cost | 935,000 | 924,000 (3) | 11,000 |
Machine Hours | 935,000 | 932,400 (8) | 2,600 | |
2013 | Direct Labor cost | 845,000 | 840,000 (4) | 5,000 |
Machine Hours | 845,000 | 843,360 (9) | 1,640 | |
2012 | Direct Labor cost | 760,000 | 777,000 (5) | (17,000) |
Machine Hours | 760,000 | 769,440 (10) | (9,440) |
Table (4)
Working note:
The applied overhead for direct labor activity base is calculated as follows:
The applied overhead for machine hour’s activity base is calculated as follows:
Explanation:
When actual overhead incurred is less than applied overhead, the overhead is said to be overapplied. Alternatively, when actual overhead incurred is greater than applied overhead, the overhead is said to be underapplied.
(3)
To Discuss: In applying the best predetermined overhead rate as computed.
(3)

Explanation of Solution
The best predetermined overhead rate is machine hours. The total overhead applied is based on both machine hours and direct labor cost. The over- or underapplied overhead ranges from $9,440 (Overapplied) to $8,800 (Underapplied) when the rates are based on machine hours.The over- or underapplied overhead ranges from $17,000 (Overapplied) to $13,000 (Underapplied) when the rates are based on machine hours.
When comparing both, we could see less fluctuation in under or over applied overhead based on predetermined overhead rate based on machine hours in the year by year basis
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