Overhead Rates and Capacity Issues
Estate Pension Services helps clients to set up and administer pension plans that are in compliance with tax laws and regulatory requirements. The firm uses a job-order costing system in which overhead is applied to clients’ accounts on the basis of professional staff hours charged to the accounts. Data concerning two recent years appear below:
| 2010 | 2011 |
Estimated professional staff hours to be charged to | ||
clients’ accounts | 2,400 | 2,250 |
Estimated overhead cost | $144,000 | $144,000 |
Professional staff hours available | 3,000 | 3,000 |
"Professional staff hours available" is a measure of the capacity of the firm. Any hours available that are not charged to clients' accounts represent unused capacity. All of the firm's overhead is fixed.
Required:
1. Jennifer Miyami is an established client whose pension plan was set up many years ago. In both 2010 and 2011, only five hours of professional staff time were charged to Ms. Miyami's account. If the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients, how much overhead cost would have been applied to Ms. Miyami's account in 2010? In 2011?
2. Suppose that the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients as in (1) above. Also suppose that the actual professional staff hours charged to clients' accounts and the actual overhead costs turn out to be exactly as estimated in both years. By how much would the overhead be underapplied or overapplied in 2010? In 2011 ?
3. Refer back to the data concerning Ms. Miyami in (1) above. If the company bases its predetermined overhead rate on the professional staff hours available, how much overhead cost would have been applied to Ms. Miyami’s account in 2010? In 2011?
4. Suppose that the company bases its predetermined overhead rate on the professional staff hours available as in (3) above. Also, suppose that the actual professional staff hours charged to clients' accounts and the actual overhead costs turn out to be exactly as estimated in both years. By how much would the overhead be underapplied or overapplied in 2010? In 2011?
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