Chapter 4, Problem 30P

Primera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided:

Actual results reported by department and product during the year are as follows:

Required:

1. 1. Compute the plantwide predetermined overhead rate and calculate the overhead assigned to each product.
2. 2. Calculate the predetermined departmental overhead rates and calculate the overhead assigned to each product.
3. 3. Using departmental rates, compute the applied overhead for the year. What is the under- or overapplied overhead for the firm?
4. 4. Prepare the journal entry that disposes of the overhead variance calculated in Requirement 3, assuming it is not material in amount. What additional information would you need if the variance is material to make the appropriate journal entry?

To determine

Determine the plantwide predetermined overhead rate and identify the overhead assigned to each products of Company P.

Explanation of Solution

Plantwide predetermined overhead rate: Plantwide overhead rate is the rate a company uses to allocate its manufacturing overhead costs to products and cost centres. Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base which can be direct labor hours, direct labor in dollars, machine hours or direct materials.

Compute plantwide predetermined overhead rate:

$\begin{array}{c}\text{Plantwide predetermined overhead rate = }\frac{\text{Total overhead cost}}{\text{Total direct labor hours}}\\ =\frac{\left(\$384,000+\$1,152,000\right)}{\left(640,000\text{DLH}\text{+}\text{128,000 DLH}\right)}\\ =\frac{\$1,536,000}{768,000\text{DLH}}\\ =\$2\text{ per direct labor hour}\text{.}\end{array}$

Thus, the predetermined overhead rate for Company P is $2 per direct labor hour.

Ascertain the overhead assigned to each product:

$\begin{array}{c}\text{For product 1 = Plantwide predetermined overhead rate }\times \text{Total direct labor hours for product 1}\\ \text{=\$2 per DLH }\times \left(480,000+96,000\right)\text{DLH}\\ \text{=\$2 per DLH}\times \text{576,000 DLH}\\ \text{=\$1,152,000 }\end{array}$

$\begin{array}{c}\text{For product 2 = Plantwide predetermined overhead rate }\times \text{Total direct labor hours for product 2}\\ \text{=\$2 per DLH }\times \left(147,200+38,400\right)\text{DLH}\\ \text{=\$2 per DLH}\times 185,600\text{ DLH}\\ \text{=\$371,200 }\end{array}$

Thus, the overhead assigned to product 1 and product 2 are $1,152,000 and $371,200 respectively.

To determine

Compute the predetermined departmental overhead rates and ascertain the overhead assigned to each product.

Explanation of Solution

Compute predetermined departmental overhead rate:

$\begin{array}{c}\text{For department 1 = }\frac{\text{Estimated overhead cost for department 1}}{\text{Estimated}\text{direct labor hours}}\\ =\frac{\$384,000}{640,000\text{DLH}}\\ =\$0.60\text{per}\text{direct labor hour}\end{array}$

$\begin{array}{c}\text{For department 2}=\frac{\text{Estimated overhead cost for department 2}}{\text{Estimated machine hours }}\\ =\frac{\$1,152,000}{192,000\text{machine hours}}\\ =\$6.00\text{per machine hour}\end{array}$

Therefore, the predetermined departmental overhead rate of department 1 and department 2 is $0.60 per direct labor hour and $6.00 per machine hour respectively. 

Ascertain the overhead assigned to each product:

$\begin{array}{c}\text{For product 1 = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 1}\times \\ \text{Direct labor hours}\end{array}\right)\\ +\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 2}\times \\ \text{machine hours}\end{array}\right)\end{array}\right\}\\ =\left\{\left(\$0.60\times 480,000\text{DLH}\right)+\left(\$6.00\times 24,800\text{machine hours}\right)\right\}\\ =\$288,000+\$148,800\\ =\$436,800\end{array}$

$\begin{array}{c}\text{For product 2 = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 1}\times \\ \text{Direct labor hours}\end{array}\right)\\ +\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 2}\times \\ \text{machine hours}\end{array}\right)\end{array}\right\}\\ =\left\{\left(\$0.60\times 147,200\text{DLH}\right)+\left(\$6.00\times 180,000\text{machine hours}\right)\right\}\\ =\$88,320+\$1,080,000\\ =\$1,168,320\end{array}$

Thus, the overhead assigned to product 1 and product 2 is $436,800 and $1,168,320 respectively.

To determine

Calculate the applied overhead for the year and determine the under-or-overapplied overhead for the Company P.

Explanation of Solution

Applied overhead: The total overhead charged to actual production at any point of time is termed as applied overhead.

Overapplied overhead: The difference between actual and applied overheads is known as overhead variances. If the applied overhead is more than the actual overhead, then the variance is known as overapplied overhead.

Underapplied overhead: The difference between actual and applied overheads is known as overhead variances. If the applied overhead is less than the actual overhead, then the variance is known as underapplied overhead

Compute total applied overhead rate:

$\begin{array}{c}\text{Total applied overhead = }\left\{\begin{array}{l}\left[\begin{array}{l}\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 1}\times \\ \text{Direct labor hours}\end{array}\right)\\ +\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 2}\times \\ \text{machine hours}\end{array}\right)\end{array}\right]+\\ \left[\begin{array}{l}\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 1}\times \\ \text{Direct labor hours}\end{array}\right)\\ +\left(\begin{array}{l}\text{Predetermined departmental overhead rate for department 2}\times \\ \text{machine hours}\end{array}\right)\end{array}\right]\end{array}\right\}\\ =\left\{\begin{array}{l}\left[\left(\$0.60\times 480,000\text{DLH}\right)+\left(\$6.00\times 24,800\text{machine hours}\right)\right]+\\ \left[\left(\$0.60\times 147,200\text{DLH}\right)+\left(\$6.00\times 180,000\text{machine hours}\right)\right]\end{array}\right\}\\ =\$436,800+\$1,168,320\\ =\$1,605,120\end{array}$

Therefore, the total applied overhead is $1,605,120.

Determine the under-or-overapplied overhead:

$\begin{array}{c}\text{Under-or-overapplied overhead = Total actual overhead }-\text{Total applied overhead}\\ \text{=}\left(\left(\$400,000+\$1,232,000\right)-\$1,605,120\right)\\ =\$1,632,000-\$1,605,120\\ =\$26,880\left(\text{underapplied}\right)\end{array}$

Since, the applied overhead is less than the actual overhead, the variance of $26,880 is underapplied overhead.

To determine

Record the journal entry to dispose the overhead variance by assuming that it is not material in amount and identify the required additional information if the variance is material to make the appropriate journal entry.

Explanation of Solution

Prepare the journal entry to dispose the overhead variance:

Date	Account title and explanation	Debit ($)	Credit ($)
	Cost of goods sold	26,880
	Overhead control		26,880
	(To record the entry to dispose of the variance at the end of the year)

Table (1)

Therefore, if the variance is material, we would need to know the balances of following Accounts

• Work-in-progress account
• Finished goods account
• Cost of goods sold account.