Activity – Accounting for overhead

Problem 1
The Circle Company estimates factory overhead at 450,000 for the next fiscal year. It is
estimated that 90,000 units will be produced at a material cost of 600,000. Conversion will
require an estimated 100,000 direct labor hours at a cost of 3 per hour with 45,000 machine
hours.

The company actual factory overhead for the year was 600,000.

Using material cost there was under applied of 75,000 to overhead.

Using units of production there was under applied of 20,000 to overhead.
Using machine hours there was over applied of 10,000 to overhead.
Using direct labor cost there was over applied of 30,000 to overhead.
Using direct labor hours there was over applied of 7,500 to overhead.

A. Compute the predetermined factory overhead rate based on:

1. Materials cost
2. Units of production
3. Machine hours
4. Direct labor cost
5. Direct labor hours

(1)
450,000 / 600,000 = 0.75 per 1-peso material cost / 75% of material cost
(2)
450,000 / 90,000 = 5 per units produced
(3)
450,000 / 45,000 = 10 per machine hours
(4)
100,000 x 3 = 300,000
450,000 / 300,000 = 1.5 per 1-peso labor cost
(5)
450,000 / 100,000 = 4.5 per labor hours

B. Compute for the actual:

1. Materials cost
2. Units of production
3. Machine hours
4. Direct labor cost
5. Direct labor hours

(1)
75,000 x 75% = 56,250
(2)
20,000 x 5 = 100,000
(3)
10,000 x 10 = 100,000
(4)
30,000 x 1.5 = 45,000
(5)
7,500 x 4.5 = 33,750
Problem 2
The Chromosome manufacturing Company produces two products, X and Y. The company
president, Gene Mutation, is concerned about the fierce competition in the market for product X.
he notes that competitors are selling X for a price well below Chromosome’s price of 12.70. At
the same time, he notes that competitors are pricing product Y almost twice as high as
Chromosome’s price of 12.50.

Mr. Mutation has obtained the following data for a recent time period:

Product X Product Y
Number of units 10,000 4,000
Direct materials cost per unit 3.23 3.65
Direct labor cost per unit 2.25 2.10
Direct labor hours 10,000 2,500
Machine hours 2,100 2,800
Inspection hours 80 100
Purchase orders 10 30

Mr. Mutation has learned that overhead costs are assigned to products on the basis of direct labor
hours. The overhead costs for this time period consisted of the following items:

Overhead cost item Amount

Inspection costs 16,200
Purchasing costs 8,000
Machine costs 49,000
TOTAL 73,200

1. Using the direct labor hours to allocate overhead cost, determine the unit cost of Product X.
-73,200 / 10,000 = 7.32
2. Using the direct labor hours to allocate overhead cost, determine the unit cost of Product Y.
-73,200 / 4,000 = 18.3
3. Using the activity-based costing; determine the unit cost of Product X.
-7.32 x 12.70 = 92.96
4. Using the activity-based costing; determine the unit cost of Product Y.
-18.3 x 12.50 = 228.75