Answer:
<u>Required A</u>
Part 1
<em>Actual overhead rate = Actual Overheads ÷ Actual hours used</em>
Therefore,
Dep A = $35,640 ÷ 8,100 = $4.40
Dep B = $36,040 ÷ 1,440 = $25.03
Dep C = $38,220 ÷ 1,280 = $29.86
Part 2
<em>Overheads applied = Overhead rate × hours used</em>
Therefore,
Overheads applied = $4.40 × 650 hours = $2,860
Part 3
1. Actual costing delays product costing as the information is only available after the period.
2. Difficult to deal with for fluctuating or seasonal sales as new rates always need to be calculated.
<u>Required B</u>
Part 1
1. Product Costing can be done on time hence price setting can also be done at an earlier stage.
2. Rates are determined consistently for fluctuating or seasonal sales
Part 2
<em>Predetermined overhead rate = Budgeted Overheads ÷ Budgeted hours </em>
Therefore,
Dep A = $380,000 ÷ 95,000 = $4.00
Dep B = $420,000 ÷ 70,000 = $6.00
Dep C = $510,000 ÷ 35,000 = $14.57
Part 3
<em>Overheads applied = Predetermined overhead rate × hours used</em>
Therefore,
Overheads applied for January,
Department A = $4.00 × 8,100 hours = $32,400
Department B = $6.00 × 1,440 hours = $8,640
Department C = $14.57 × 1,280 hours = $18,649.60
Part 4
If <em>Actual Overheads > Applied Overheads</em>, we say overheads are under-applied,
and
If <em>Applied Overheads > Actual Overheads</em>, we say overheads are over-applied.
Therefore,
<u>Department A :</u>
Actual Overheads = $35,640
Applied Overheads = $32,400
Therefore, overheads are under-applied by $3,240
<u>Department B :</u>
Actual Overheads = $36,040
Applied Overheads = $8,640
Therefore, overheads are under-applied by $27,400
<u>Department C :</u>
Actual Overheads = $38,220
Applied Overheads = $18,649.60
Therefore, overheads are under-applied by $19,570.40
Part 5
<u>Department A</u>
Cost of Sales = $3,240
<u>Department B</u>
Cost of Sales = $27,400
<u>Department C</u>
Cost of Sales = $19,570.40
Part 6
<u>Department A</u>
Cost of Sales = $3,240
<u>Department B</u>
Cost of Sales = $27,400
<u>Department C</u>
Cost of Sales = $19,570.40
Explanations :
See the formulas and calculations tied together with the solution above.
Note that :
If <em>Actual Overheads > Applied Overheads</em>, we say overheads are under-applied,
and
If <em>Applied Overheads > Actual Overheads</em>, we say overheads are over-applied.
Also that ,
Balances in the Overheads Account are closed off against the Cost of Goods Sold in the Income Statement.
