Question

Q.5.a. Normal annual capacity for the MN Company is 36,000 machine hours, with fixed overhead budgeted as 16,920 and an estimated variable factory overhead rate of $2.10 per hour. During October, actual production required 2,700 machine hours, with a total factory overhead of $7,400.
Required: Compute (1) The applied factory overhead and (2) the over-or under applied amount for October (5)
Q.5.b. Define process costing, discuss normal and abnormal loss?

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Answer 1

Q.5.a. Computation of:

1) Applied factory overhead

= Actual machine hours × predetermined overhead rate

= 2700 machine hours × $2.57

= $6939

Notes:

*predetermined overhead rate

= Fixed overhead rate + variable overhead rate

= (budgeted fixed overhead/budgeted machine hours) + variable overhead rate

= ($16920/36000hrs) + $2.10

= $0.47 + $2.10

= $2.57 per machine hour

2) Over or Underapplied amount of overhead

= Total factory overhead - Applied factory overhead

= $7400 - $6939

= $461 underapplied

(underapplied, since applied overhead < total overhead)

Q.5.b.

Process costing:

- Process costing is a method of costing in which the product has been undergone through different processes and the costs have been applied at different stages.

- Process costing method is usually adopted by those businesses operates with mass production activity

- Examples: Crued oil products, food processing, chemicals manufacturing etc.

Normal loss

- Normal loss is a loss occurred during the normal course of production activity which can be pre-estimated.

- The amount of normal loss occurred will be added to the total cost of production.

Abnormal loss:

- Abnormal loss is a loss occurred due to the happening of abnormal events in the course of business activity.

- Normally, abnormal loss occurred due to fire accidents, transport abnormalities, short circuits etc.

- It can't be pre-estimated

- The abnormal loss will not be added to the cost of production and should treated as loss in profit and loss statement.

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