Question

Factory Overhead Rates and Account Balance

Prostheses Industries operates two factories. The manufacturing operations of Factory 1 are machine intensive, while the manufacturing operations of Factory 2 are labor intensive. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:

		Factory 1		Factory 2
Estimated factory overhead cost for fiscal
	year beginning August 1	$699,300		$952,000
Estimated direct labor hours for year				14,000
Estimated machine hours for year		16,650
Actual factory overhead costs for August		$55,960		$82,250
Actual direct labor hours for August				1,260
Actual machine hours for August		1,300

a. Determine the factory overhead rate for Factory 1. Round your answer to the nearest cent.
$ per machine hour

b. Determine the factory overhead rate for Factory 2. Round your answer to the nearest cent.
$ per direct labor hour

c. Determine the factory overhead applied to production in each factory for January.

Factory 1	$
Factory 2	$

d. Determine the balances of the factory accounts for each factory as of January 31, and indicate whether the amounts represent overapplied or underapplied factory overhead.

Factory 1	$
Factory 2	$

e. Explain why Factory 1 uses machine hours to allocate factory overhead while Factory 2 uses direct labor hours.
Factory overhead should be allocated using a base that is related to (causes) the overhead costs incurred. Factory 1 has a   manufacturing operation, and Factory 2 has a   manufacturing operation. Thus, Factory 1 uses machine hours, and Factory 2 uses direct labor hours to allocate factory overhead.

Answer 1

Answer:-

a) Factory overhead rate for factory 1 = 699,300/16,650 = 42 per machine hour

b) Factory overhead rate for factory 2 = 952,000/14,000 = 68 per labor hour

c) Calculate overhead applied :

Factory 1 = 1300*42 = 54,600

Factory 2 = 1,260*68 = 85,680

d) Calculate over and under applied overhead

Factory 1 = 54,600-55,960 = 690 Under applied

Factory 2 = 85,680-82,250 = 3,430 Over applied

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