Chapter 3, Problem 3AE

To determine

Under applied and Over applied:

When actual manufacturing overhead cost is exceeded the estimated manufacturing over head applied is known as under applied.

When actual manufacturing overhead cost is less than the estimated manufacturing over head applied cost is known as over applied.

Part (2) manufacturing overhead has under applied whether it has changed or not due to new allocation machine hours.

Answer to Problem 3AE

Solution:

Computation of the predetermined overhead rate
Particulars	Amount	Amount
Estimated manufacturing overhead cost	$100,000
Estimated total amount of the allocation base	40,000	Machine hours
Predetermined over head rate	$2.5	Per machine hour

Computation of under applied or over applied of
manufacturing overhead cost
Particulars	Amount
Actual manufacturing overhead cost	$90,000
Manufacturing overhead cost applied to work:
Predetermined over rate	$2.5	Per machine hour
Actual total amount of allocation base	40,000	Machine hours
Manufacturing over head applied	$100,000
(Over applied) manufacturing over head	(10,000)

Formula:

  $\begin{array}{l}\begin{array}{l}Predeterminedoverrate =Estimatedmanufacturingoverheadcost/Estimatedtotalamount\\ oftheallocationbase.\end{array}\hfill \\ \hfill \\ Manufacturingoverheadapplied=Predeterminedoverrate *actualallocationbase\hfill \\ \hfill \\ \begin{array}{l}Overappliedformula= Actualmanufacturingoverhead isless\\ than estimatedmanufacturingoverheadapplied.\end{array}\hfill \end{array}$

Explanation of Solution

Explanations:

  $\begin{array}{l}Predeterminedoverrate =\$100,000/40,000=\$\mathrm{2.5.}\hfill \\ Manufacturingoverheadapplied=\$2.5*40,000machinehours=\$100,000\hfill \\ Overappliedformula=\$90,000-\$100,000=-\$10,000\hfill \end{array}$

  $\begin{array}{l}Part\left(2\right)predeterminedoverrate is\$2.\hfill \\ Atpresentpredeterminedoverrate is\$2.50\hfill \\ Increased=\$2.50-\$2=\$\mathrm{0.50.}\hfill \end{array}$

  $\begin{array}{l}Inpart\left(2\right)manufacturingunderappliedby10,000.\hfill \\ Nowitischangedtooverappliedby\$10,000dueto predeterminedoverrate increasedby\$0.50\hfill \\ Part\left(2\right) manufacturingoverheadapplied is\$80,000\hfill \\ Part\left(2\right) actual manufacturingoverhead is\$90,000\hfill \\ So,ithasunderappliedby\$10,000\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Atpresentmanufacturingoverheadapplied is=\$100,000.\hfill \\ Actual manufacturingoverhead is\$90,000\hfill \\ So,ithasoverappliedby\$10,000\hfill \end{array}$

  $\begin{array}{l}IncreasedPredeterminedrate=\$0.50*40,000\left(actualallocationbase\right)=\$20,000\hfill \\ Part\left(2\right) manufacturingoverheadapplied is\$80,000+ \$20,000\left(IncreasedPredeterminedrate\right)\hfill \\ =\$100,000 -\$90,000 (presentactual manufacturingoverhead)=\$10,000\left(overapplied\right)\hfill \\ \hfill \end{array}$

Conclusion

Above calculation stated, given data resulted over applied the manufacturing overhead which is different from part (2)