Chapter 3, Problem 1AE

To determine

Under applied and over applied:

Company would estimate the manufacturing overhead cost to allot the estimate amount to the manufacturing department.

If actual manufacturing overhead cost is exceeded the estimated applied cost is called as under applied.

At the same time, actual manufacturing overhead cost is lower than the estimated applied cost is called as over applied.

Whether manufacturing overhead cost is over applied or under applied.

Answer to Problem 1AE

Solution:

Particulars	Amount
Estimated manufacturing overhead cost	$300,000
Estimated total amount of the allocation base	60,000	Machine hours
Predetermined over head rate	$5	Per machine hour

Computation of under applied or over applied of
Manufacturing overhead cost
Particulars
Actual manufacturing overhead cost	$290,000
Manufacturing overhead cost applied to work:
Predetermined over head rate	$5	Per machine hour
Actual total amount of allocation base	68,000	Machine hours
Manufacturing over head applied	$340,000
(Over applied) manufacturing overhead cost	($50,000)

Formula:

  $\begin{array}{l}\begin{array}{l}Predeterminedoverrate=Estimatedmanufacturingoverheadcost/Estimatedtotal\\ amountoftheallocationbase.\end{array}\hfill \\ \hfill \\ \begin{array}{l}Overappliedformula=Actualmanufacturingoverheadislessthanestimated\\ manufacturingoverheadapplied.\end{array}\hfill \end{array}$

$$

Explanation of Solution

Explanations:

  $\begin{array}{l}\$300,000/60,000=\$5permachinehour\hfill \\ \hfill \\ ActualmanufacturingoverheadPredeterminedoverrate=\$290,000\hfill \\ \hfill \\ \begin{array}{l}Estimatedmanufacturingoverheadapplied=68000machineshours*\$5permachinehour\\ =\$340,000\end{array}\hfill \\ \$290,000-\$340,000=-\$50,000\hfill \\ \hfill \\ \begin{array}{l}Companyhasoverappliedthemanufacturingoverheadbecauseactualoverhead\\ islessthanestimatedapplied,itresultedtooverappliedby\$50,000.\\ \end{array}\hfill \\ \hfill \end{array}$

Yes, estimated manufacturing overhead applied has changed due to estimated allocation base decreased it lead predetermined rate to increased by $1 that lead to over applied the manufacturing over head.

Old predetermined rate is $300,000 / 75,000=$4: New predetermined rate is $300,000/ 60000=$5=$1 increased

Conclusion

Above calculations stated manufacturing overhead has over applied.