Question

Primera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided:
Department 1 Department 2
Direct labor hours 640,000 128,000
Machine hours 16,000 192,000
Overhead cost $384,000 $1,152,000
Actual results reported by department and product during the year are as follows:
Department 1 Department 2
Direct labor hours 627,200 134,400
Machine hours 17,600 204,800
Overhead cost $400,000 $1,232,000
Product 1 Product 2
Direct labor hours:
Department 1 480,000 147,200
Department 2 96,000 38,400
Machine hours:
Department 1 8,000 9,600
Department 2 24,800 180,000
Required:
1. Compute the plantwide predetermined overhead rate and calculate the overhead assigned to
each product.
2. Calculate the predetermined departmental overhead rates and calculate the overhead
assigned to each product.
3. Using departmental rates, compute the applied overhead for the year. What is the under- or
overapplied overhead for thefirm?
4. Prepare the journal entry that disposes of the overhead variance calculated in Requirement
3, assuming it is not material in amount. What additional information would you need if
the variance is material to make the appropriate journal entry?

Answer 1

Answer:

Primera Company

1. Plantwide predetermined overhead rate:

= $1,536,000/768,000

= $2.00 per direct labor hour

Overhead assigned to each product:

                                   Product 1    Product 2

Direct labor hours     480,000        147,200

Predetermined overhead

 rate  = $2 per direct labor hour

Total overhead =    $960,000    $294,400

2. Predetermined departmental overhead rates:

Department 1:    

Direct labor hours $2 ($1,536,000/768,000)

Department 2

Machine hours = $7.385 ($1,536,000/208,000)

Overhead assigned:

Product 1 = $960,000 (480,000 * $2)

Product 2 = $70,896 (9,600 * $7.385)

3. The applied overhead for the year:

Department 1 = $1,254,400 (627,200 * $2)

Department 2 = $1,512,448 (204,800 * $7.385)

Total   =            $2,766,848

Overapplied overhead for the firm = $1,134,848 ($2,766,848 - $1,632,000)

4. Debit Manufacturing overhead $1,134,848

Credit Cost of goods sold $1,134,848

To transfer the overapplied overhead to cost of goods sold.

Additional information needed if the variance is material is to determine the percentages to allocated to Work in process, Finished Goods, and Cost of Goods Sold.

Explanation:

a) Data and Calculations:

Estimates:

                            Department 1   Department 2      Total  

Direct labor hours    640,000            128,000        768,000

Machine hours            16,000            192,000        208,000

Overhead cost       $384,000       $1,152,000    $1,536,000

Actual results:

                            Department 1   Department 2      Total  

Direct labor hours     627,200             134,400       761,600

Machine hours             17,600            204,800      222,400

Overhead cost       $400,000       $1,232,000  $1,632,000

                       Product 1 Product 2        Total  

Direct labor hours:

Department 1 480,000    147,200      627,200

Department 2  96,000     38,400       134,400

Machine hours:

Department 1    8,000        9,600         17,600

Department 2 24,800    180,000      204,800