Question

Predetermined Overhead Application Rate (POHAR) = Estimated total Annual Overhead Costs/ Estimated total Annual overhead application base. The application the allocation base has traditionally been Direct Labor hours or Machine hours. For example, the formula above can be translated into numbers as $3,000,000/ 300,000 = $10 per Direct labor hour. This formula is interpreted as follows: A product or a service will be charged overhead cost at the rate of $10 for each direct labor hour that the product or service consumes. Therefore, if a product consumes 1 direct labor hour it will be charged $10 for overhead costs. Product cost = DM + DL +OH would look like: DM +DL+ 10. Similarly, if a product takes 3 direct labor hours overhead cost would be $30. This Product Cost Equation contains the same information as the Work In Process (W,I.P) account in the general ledger. In the WIP account,  unless otherwise indicated, the amount recorded as OH always represents Applied Overhead not Actual Overhead COST. It is very important to understand this technical definition of overhead cost.

ASSIGNMENT

Use the information given below to determine the product cost per unit.

Abel Furniture completed 80 tables and incurred the following costs:

Materials purchase $1,200,000 which included $150,000 for screws, nuts, rivets, paint and sandpaper. Grease, and other lubricants cost $50,000. Assembly line workers were paid for 15,000 hours at the rate of $20 per hour. Other costs incurrred were: Landscaping $5,000, Security Guards, $50,000; Foremen $250,000; Janitors $25,000, maintenace $120,000; utilities $18,000; property taxes $23,000; building and equipment insurance $9,000, building rent $25,000. The estimated annual overhead cost were $800,000 and estimated direct labor hours 20,000.   

Required:

1. Calculate the cost of Direct Materials

2. Calculate the cost of Direct labor

3.  Show the individual amounts debited to Manufacturing Overhead Control Account and the total amount

4. Calculate the POHAR

5. Calculate the Under/over applied overhead

6. Calculate the unit cost of a table.

Answer 1

1. Cost of direct materials = $1200000 - $150000 = $1050000

Note: Since no beginning or ending inventories are given, the entire purchases is assumed to be consumed.

2. Cost of direct labor = 15000 hours x $20 = $300000

3. Individual amounts debited to Manufacturing Overhead Control Account:

Indirect materials:
Screws, nuts, rivets, paint and sandpaper	150000
Grease and other lubricants	50000
Indirect labor:
Security guards	50000
Foremen	250000
Janitors	25000
Other manufacturing costs:
Landscaping	5000
Maintenance	120000
Utilities	18000
Property taxes	23000
Building and equipment insurance	9000
Building rent	25000
Total $	725000

Note: The classification into indirect materials, indirect labor, and other manufacturing costs has been shown for purpose of better understanding.

4. POHAR = Estimated annual overhead cost/Estimated direct labor hours = $800000/20000 = $40 per direct labor hour

5.

Actual overheads incurred	725000
Overheads applied (15000 x $40)	600000
Under applied overhead $	125000

6.

Direct materials	1050000
Direct labor	300000
Manufacturing overheads	600000
Total manufacturing cost $	1950000
Divide by: Number of tables completed	80
Unit cost of a table $	24375

Note: The unit cost of a table is very unrealistically high since no work in process inventory details have been given due to which the entire manufacturing cost incurred is allocated to the completed units.