Question

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Demo Problem 1 Predetermined Overhead Rate; Application of Overhead; Peyton's Place, LLC makes neck braces for ailing quarterbacks. All of these neck braces are hand sewn and machine embroidered with their team logo. The firm estimates incurring $650,000 in total overhead in the coming year. Additionally, they expect their annual direct labor hour use to be 125,000 hours and they expect to use 50,000 embroidery machine hours. The firm expects 65% of their total overhead to be sewing related and the remainder to be embroidery. The firm allocates OH separately for each department. In January 2016, the firm received an order for 2,000 braces to be worn by Newton's Ninjas in the end zone at Levi Stadium. The firm had the following information in the month of January: Direct Materials Direct Labor Cost Direct Labor Hours Embroidery Machine Hours Newton's Job $9,600 $12/hour 280 430 Required: 1. Calculate the pre-determined OH rate for Peyton's Place. 2. Calculate the cost per unit for each neck brace in the Newton's Ninjas order. 3. At the end of the month, Mr. Elway, the accountant for Peyton's Place figures that the firm actually spent $3,000 in overhead related to the Newton job. What is the amount of over/under- applied OH? 4. What is the journal entry to dispose of the OH variance assuming it was insignificant to the firm's operations.

Answer 1

1. Pre determined OH rate= Total expenses/Total hours

Sewing deptt=(65%*650000)/125000= 422500/125000=$3.38 per hr

Embroidery deptt= $227500/50000=$4.55 per hr

2. Total cost for braces

Direct materials = $9600

Direct labour =$12*280=$3360

Sewing deptt overhead =$3.38*0

Embroidery deptt overhead =$4.55*430=$1956.5

Total cost =$14916.5

No of braces =2000

Cost per unit=$7.45825

3. Actual overhead =$3000

Applied overhead=$1956.5

Underapplied overhead =$1043.5

4. Cost of Goods Sold a/c Dr 1043.5

To manufacturing overhead 1043.5

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