Question

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Practice Problem 1 Accounting for overhead; Budgeted rates The Solomon Company uses a budgeted overhead rate for applying factory overhead to job orders on a machine hour basis for the machining department and on a direct labor cost basis for the finishing department. The company budgeted the following for 20_1: Factory overhead Machine hours Direct labor hours Direct labor cost Machining $10,000,000 200,000 30,000 Finishing $8,000,000 33,000 160,000 $900,000 $4,000,000 Required: 1. What is the budgeted overhead rate that should be used in the machining department? During the month of January, the cost record for job order no. 431 shows the following: Machining Finishing $14,000 $3,000 Direct materials requisitioned Direct labor cost Direct labor hours Machine hours $1,250 $ 600 30 130 2. What is the total overhead applied to Job 431? 3. Assuming that Job 431 consisted of 200 units of product, what is the unit cost of Job 431?

Answer 1

Answer with working note and explanation is given below

1 Budgeted Overhead rate Factory overhead Machine hours Machine hour rate Machining $10,000,000 200,000 $50.00 Budgeted Overhead rate Factory overhead Direct Labor hours Direct Labor hour rate Finishing $8,000,000 160,000 $50.00 2 Total Overhead applied to Job 431 Machine Machining Department hours Overhead applied Machine hour rate $50 Total Overheads Applied $6,500 Finishing Department Direct Labor hours 50 Labor hour ratel $50 Total Overheads Applied $2,500 Overhead applied $14,000 $3,000 3 Unit cost of Job 431 Direct Material Machining Department Finishing Department Direct Labor Machining Department Finishing Department Overhead applied Machining Department Finishing Department Total production cost Total units $600 $1,250 $6,500 As calculated above $2,500 As calculated above $27,850 200 Unit Cost of Job 431 $139.25 Pre-determined OH rate Machine hours Labour hours- See WN below Total Overhead absorbed Actual Overhead incurred (Under/Over absorption Machining Finishing Factory $50.00 $50.00 220,000 164,000 $11,000,000 $8,200,000 $19,200,000 AXB $11,200,000 $7,900,000 $19,100,000 -$200,000 $300,000 $100,000 Under-absorbed Over-absorbed Over-absorbed $1,250 Working note for labor hours Total Direct labor cost Job 431 Direct labor hours Direct labor hour rate $25 Direct labor hours - Finishing department Direct labor cost $4,100,000 Direct labor hour rate Direct labor hours 164,000 $25 5 Reasons why Solomon uses 2 different overhead application rates The 2 departments have different cost drivers hence 2 different rates are used for overhead application Machining department is machine intensive hence machine hours are used as basis for overhead application Finishing department is labor intensive hence labor hours are used as basis for overhead application