Question

Bramble Manufacturing Company, a small manufacturer of appliance parts, has just completed its first year of operations. The company's controller, Joseph Moore, has been reviewing the results for the year and is concerned about the application of factory overhead. Trainor is using the following information to assess operations. Bramble uses several machines with a combined cost of $2,260,000 and no residual value. Each machine has an output of 5 units of product per hour and a useful life of 24,000 machine hours. Selected actual data on Bramble's operations for the year just ended are as follows: Products manufactured Machine use Direct labor Labor rate Total factory overhead Cost of Goods Sold Finished Goods Inventory (year-end) Work in Process Inventory (year-end) 656,000 units 130,000 hours 23,000 hours $ 15 per hour $ 1,130,000 $ 1,739,360 $ 431,240 $ 0 Total factory overhead is applied based on direct labor cost using a predetermined plantwide rate. Budgeted activity for the year included 10 employees each working 1,800 productive hours per year to produce 506,250 units of product. Because the machines are highly automated, each employee can operate two to four machines simultaneously. Normal activity is for each employee to operate three machines. Machine operators are paid $15 per hour. Overhead was budgeted at $810,000.

Answer 1

(a) Predetermined overhead rate = Budgeted overhead/Budgeted direct labor cost

Budgeted direct labor cost = 10 x 1800 x $15 = $270,000

Predetermined overhead rate = $810,000/$270,000 = 300% of direct labor cost

Overhead applied = 300% x (23,000 x $15) = 300% x $345,000 = $1,035,000

Total factory overhead = $1,130,000

Under-applied overhead = $1,130,000 - $1,035,000 = $95,000

Overhead underapplied by $95,000