Question

Calculating Departmental Overhead Rates and Applying Overhead to Production

At the beginning of the year, Videosym Company estimated the following:

	Assembly Department		Testing Department		Total
Overhead	$620,000		$180,000		$800,000
Direct labour hours	155,000		20,000		175,000
Machine hours	80,000		120,000		200,000

Videosym uses departmental overhead rates. In the assembly department, overhead is applied on the basis of direct labour hours. In the testing department, overhead is applied on the basis of machine hours. Actual data for the month of March are as follows:

	Assembly Department		Testing Department		Total
Overhead	$53,000		$15,500		$68,500
Direct labour hours	13,000		1,680		14,680
Machine hours	6,800		13,050		19,850

Required:

1. Calculate the predetermined overhead rates for the assembly and testing departments. Round your answers to the nearest cent.

Assembly department overhead rate	$ per direct labour hour
Testing department overhead rate	$ per machine hour

2. Calculate the overhead applied to production in each department for the month of March.

Assembly department	$
Testing department	$

3. By how much has each department's overhead been overapplied? Underapplied?

Assembly department		$
Testing department		$

Answer 1

Overhead costs frequently called to ask overhead or operating expenses, refer to those expenses related with operation a business that expenses not directly connected with product or service.

Answer :

1) Predetermined overheads rates department wise.

Once the total overheads of each department are decided then the next step is to compute cost drive rate of overheads. The rate is finding out by dividing the total overheads of an activity by its cost driver rate. Assembly overheads allocated on the basis of direct labor hours and testing department overheads on the base of Machine hours.

a) Assemble rate per hour:

            Over head rate = Total Estimated Assembly overheads / Estimated labor hours

Total Estimated Assembly overheads	$ 620,000
Divided by : Estimated labor hours	÷ 155,000 hrs
Rate per hour	$ 4 per hour

b) Testing department rate per hour:

Over head rate = Total Estimated Testing overheads / Estimated machine hours

Total Estimated testing overheads	$ 180,000
Divided by : Estimated machine hours	÷ 120,000 hrs
Rate per hour	$ 1.5 per hour

2. Calculate the overhead applied to production in each department for the month of March.

            Now overheads allocated to each department on the base of actual hours

a) Assemble Department overheads applied:

       Overheads applied = Actual direct labor hours * direct laour rate per hour

Total Actual labor hours	13,000 hrs
Multiply by : Rate per hour	* $ 4 per hour
Total Assembly overheads	$ 52,000

b) Testing Department overheads applied:

       Overheads applied = Actual Machine labor hours * Machine rate per hour

Total Machine hours	13,050 hrs
Multiply by : Rate per machine hour	* $ 1.5 per hour
Total Assembly overheads	$ 19,575

3. By how much has each department's overhead been over applied ? Under applied ?

Over applied and under applied overheads.

When actual overheads is less than the applied overhands it is called over applied and when actual overheads is more than the allocated over heads it is called under applied.

• Over applied and under applied overheads

                        = Actual overheads – Applied over heads

a) Assembly department

Total actual assembly overheads	$ 53,000
Less : Applied assembly overheads	$ 52,000
Under applied overheads	$ 1,000

b) Testing department

Total actual testing overheads	$ 15,500
Less : Applied assembly overheads	$ 19,575
Over applied overheads	$ 4,075