Concept explainers
(1)
Ascertain the predetermined factory
(1)

Explanation of Solution
Predetermined factory overhead rate
Normally,
The predetermined overhead rate for alternative activity base is prepared as follows:
Direct labor cost:
Machine hours:
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.
Working notes:
Total overhead for (Year 1 – Year 5) is calculated as follows:
Factory Overhead (Actual) | Amount($) |
Year 1 | 790,000 |
Year 2 | 870,000 |
Year 3 | 935,000 |
Year 4 | 845,000 |
Year 5 | 760,000 |
4,200,000 |
Table (1)
Total direct labor cost, (Year 1 – Year 5) is computed as below:
Direct labor cost | Amount($) |
Year 1 | 3,885,000 |
Year 2 | 4,410,000 |
Year 3 | 4,620,000 |
Year 4 | 4,200,000 |
Year 5 | 3,885,000 |
21,000,000 |
Table (2)
Total machine hours, (Year 1 – Year 5) is computed as follows:
Machine hours | Hours |
Year 1 | 93,000 |
Year 2 | 104,000 |
Year 3 | 111,000 |
Year 4 | 100,400 |
Year 5 | 91,600 |
500,000 |
Table (3)
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)
Ascertain 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) | ||
Year 5 | Direct Labor cost | 790,000 | 777,000(1) | 13,000 |
Machine Hours | 790,000 | 781,200 (6) | 8,800 | |
Year 4 | Direct Labor cost | 870,000 | 882,000(2) | (12,000) |
Machine Hours | 870,000 | 873,600 (7) | (3,600) | |
Year 3 | Direct Labor cost | 935,000 | 924,000(3) | 11,000 |
Machine Hours | 935,000 | 932,400 (8) | 2,600 | |
Year 2 | Direct Labor cost | 845,000 | 840,000(4) | 5,000 |
Machine Hours | 845,000 | 843,360 (9) | 1,640 | |
Year 1 | Direct Labor cost | 760,000 | 777,000(5) | (17,000) |
Machine Hours | 760,000 | 769,440 (10) | (9,440) |
Table (4)
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 under applied.
Working note (1):
The applied overhead for direct labor activity base is calculated as follows:
Working note (2):
Working note (3):
Working note (4):
Working note (5):
Working note (6):
The applied overhead for machine hour’s activity base is calculated as follows:
Working note (7):
Working note (8):
Working note (9):
Working note (10):
(3)
Suggest 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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