Question

Overhead Rate, Flexible Budget, and Over-Absorbed Overhead Snyder Stampings allocate overhead to products based on machine hours. It uses a flexible overhead budget to calculate a predetermined overhead rate at the beginning of the year. This rate is used during the year to allocate overhead to the various stampings produced. The following data summarizes operations for the last year: Budgeted fixed overhead $3,800,000 Over-absorbed overhead variance $220,000 Actual machine-hours 46,000 Variable overhead per machine hour $100 Actual overhead incurred $8,750,000

Required: In setting the overhead rate at the beginning of the year, what budgeted volume of machine-hours was used?

Answer 1

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Over-absorbed overhead	Actual overhead – overhead absorbed
($220,000)	= $8,750,000 – Overhead absorbed
Overhead absorbed	= $8,970,000
Overhead absorbed	overhead rate × Actual machine hours
$8,970,000	= Overhead rate × 46,000
Overhead rate	= $8,970,000 ÷ 46,000
	= $195/ machine hour
Overhead rate	Budgeted fixed overhead ÷ Budgeted volume
	+ Variable overhead per machine hour
$                                                    195	= $3,800,000 ÷ Budgeted volume + $100
Budgeted volume	= $3,800,000 ÷ [$195 - $100]
	= 40,000 machine hours