Question

Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:    

Computer-hours		80,000
Fixed manufacturing overhead cost	$	1,277,000
Variable manufacturing overhead per computer-hour	$	4.00

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

   

Computer-hours		50,000
Manufacturing overhead cost	$	1,078,000
Inventories at year-end:
Raw materials	$	420,000
Work in process	$	190,000
Finished goods	$	1,020,000
Cost of goods sold	$	2,790,000

Required:  

1. Compute the company’s predetermined overhead rate for the year. (Round predetermined overhead rate to 2 decimal places.)

2. Compute the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.)

Answer 1

1.

Fixed manufacturing overhead per computer hour = Fixed manufacturing overhead cost/Computer hours

= 1,277,000/80,000

= $15.96

Variable manufacturing overhead per computer-hour = $4

predetermined overhead rate = Fixed manufacturing overhead per computer hour + Variable manufacturing overhead per computer-hour

= 15,96 + 4

= 19.96

2.

Actual overhead cost = $1,078,000

Applied overhead = Actual computer hour x  predetermined overhead rate

= 50,000 x 19.96

= $998,000

Under applied overhead = Actual overhead cost - Applied overhead

= 1,078,000 - 998,000

= $80,000

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