Problem 3‐48
Machining Department – overhead applied using machine hours; Assembly Department – overhead applied using direct labor cost
Machining
Assembly
Budgeted manufacturing overhead
$4,000,000
$3,080,000
Actual manufacturing overhead
4,260,000
3,050,000
Budgeted direct labor cost
1,500,000
5,600,000
Actual direct labor cost
1,450,000
5,780,000
Budgeted machine hours
400,000
100,000
Actual machine hours
425,000
110,000
Job # 775
Machiningg
Assemblyy
Direct material
$ 24,500
$ 6,700
Direct labor
27,900
58,600
Machine hours
360
150
Selling and administrative expenses ‐ $2,500,000
©Dr. Chula King
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Problem 3‐48 (continued)
Part 1: Compute the predetermined overhead rates for Machining and Assembly Departments
Machining: Budgeted Overhead ÷ Budgeted Machine Hours
$4,000,000 ÷ 400,000 hours = $10/machine hour
Assembly: Budgeted Overhead ÷ Budgeted Direct Labor Cost
$3,080,000 ÷ $5,600,000 = 55% of Direct Labor Cost
Part 2: Compute year‐end work in process inventory
Machining
Assembly
Total
Direct material
$24,500
$ 6,700
$ 31,200
Direct labor
27,900
,
58,600
,
86,500
,
Manufacturing Overhead
3,600
(360 machine hours x $10)
3,600
32,230
($58,600 x 55%)
32,230
Total
$56,000
$97,530
$153,530
©Dr. Chula King
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Problem 3‐48 (continued)
Part 3: Is overhead overapplied or underapplied in the Machining Department?
Applied manufacturing overhead (425,000 hours x $10) $4,250,000
Actual manufacturing overhead
4,260,000
Underapplied manufacturing overhead
$ 10,000
Part 4: Is overhead overapplied or underapplied in the Assembly Department?
Applied manufacturing overhead ($5,780,000 x 55%)
$3,179,000
Actual manufacturing overhead
3,050,000
Overapplied manufacturing overhead
$ 129,000
©Dr. Chula King
All Rights Reserved
Problem 3‐48 (continued)
Part 5: What happens to Cost of Goods Sold if the overapplied/ underapplied overhead is closed to that account?
The net overapplied overhead is $119,000 ($129,000 ‐ $10,000), which would be a credit balance. The entry to close the overapplied
overhead to Cost of Goods Sold is:
overhead to Cost of Goods Sold is:
Manufacturing overhead
119,000
Cost of Goods Sold
119,000
Therefore, Cost of Goods Sold would be decreased
Part 6: How much overhead was charged to Work in Process?
Work in process is charged for the applied overhead of $7,429,000 ($4,250,000 + $3,179,000)
Part 7: Comment on the appropriateness of the company’ss cost drivers
Part 7: Comment on the appropriateness of the company
cost drivers
Machining Department is heavily automated. Its cost driver is machine hours which should be strongly correlated to the amount of overhead incurred. The Assembly Department performs a number of manual‐
assembly activities. The cost driver, direct labor cost should be highly correlated to the amount of overhead incurred.
©Dr. Chula King
All Rights Reserved