Question

Glavine Corporation manufactures precision equipment made to order for the semiconductor industry. Glavine uses two manufacturing overhead cost pools-one for the overhead costs incurred in its highly automated Machining Department and another for overhead costs incurred in its labour-based Assembly Department. Glavine uses a normal costing system. It allocates Machining Department overhead costs to jobs based on actual machinehours using a budgeted machine-hour overhead rate. It allocates Assembly Department overhead costs to jobs based on actual direct manufacturing labour-hours using a budgeted direct manufacturing labour-hour rate. The following data are for the year 2016: Machining Assembly Department Department Budgeted overhead................................................$5,850,000...............$7,812,000 Budgeted machine-hours (MH)........................................90,000..........................0 Budgeted direct manufacturing labour-hours (DMLH)...................0..................124,000 Actual manufacturing overhead costs............................$5,470,000.............$8,234,000 Machine-hours and direct manufacturing labour-hours and the ending balances (before proration of under allocated overhead) are as follows: Required: 1. Compute the budgeted overhead rates for the year in the Machining and Assembly Departments. 2. Compute the under allocated or over allocated overhead in each department for the year.

Answer 1

Answer:

1.                                               Machining           Assembly

Budgeted overhead rates

= Budgeted overhead            5,850,000        7,812,000  

  Budgeted activity level        90,000 hours   124,000 hours

                                               = $65/machine hr  = $63/labour hr

2. Overhead applied

= Overhead application rate    $65 x 80,000 hrs  $63 x 100,000

 x Actual activity level               = $5,200,000        = $6,300,000

Under allocated overhead

= Overhead applied                     = $5,200,000       = $6,300,000

- Actual overhead                          - $5,470,000        - $8,234,000

                                                         $270,000              $1,934,000

Note: Actual machine hours of 80,000 hours and actual direct labour hours of 100,00 hours are assumed because these figures were omitted from the question.

Explanation:

Budgeted overhead rate is calculated as budgeted overhead for each department divided by budgeted activity level for each department. Overhead applied is budgeted overhead rate multiplied by actual activity level  (actual hours) for each department. The actual machine hours and actual direct labour hours were omitted from the question. Thus, 80,000 machine hours and 100,000 direct labour hours were assumed for Machining Department and Assembly Department respectively. Then, under allocated overhead is calculated as overhead applied minus actual overhead incurred for each department.