Canelli Products Co.

presents the following data related to June production:

Item 100% Budget 80% Budget Actual

Materials 30,000.00 24,000.00 23,600.00
Labor 60,000.00 48,000.00 52,500.00
Factory overhead 280,000.00 250,000.00 252,500.00
370,000.00 322,000.00 328,600.00

Item 100% Budget 80% Budget Actual

Direct labor hours 5,000.00 4,000.00 4,200.00
Labor rate -‑ -‑ 12.50
Production in units 2,500.00 2,000.00 2,000.00

Compute for the Factory Overhead Rate and the under or over applied overhead under 95% budget
and that the overhead base is: 1) Direct Material Cost, 2) Direct Labor Cost, 3) Direct Labor Hours,
and 4) Unit of Production.

Compute for Fixed Overhead using Hi-Lo Method

Variable OH Rate = (280,000 - 250,000) / (2,500 - 2,000) 60

Fixed OH = 280,000 - (2,500 X 60) 130,000.00

100% Budget 80% Budget 95% Budget

Budgeted Fixed OH 130,000.00 130,000.00 130,000.00
Budgeted Var OH 150,000.00 120,000.00 142,500.00
Budgeted OH at 280,000.00 250,000.00 272,500.00

DMC DLC DLHrs

Budgeted OH 272,500.00 272,500.00 272,500.00
Budgeted Base 28,500.00 57,000.00 4,750.00
956.14% 478.07% 57.37
FOH rate
of DMC of DLC /DLHr

Actual Factory Overhead 252,500.00 252,500.00 252,500.00

Less Applied Factory Overhead
(Actual Activity X FOH rate) 225,649.12 250,986.84 240,947.37
Under/(Over) Applied Overhead 26,850.88 1,513.16 11,552.63

To close the overhead accounts

Factory Overhead Applied 225,649.12
Under Applied Overhead 26,850.88
Factory Overhead Control

To dispose the under/(over) applied overhead assuming the value is insignificant

Cost of Goods Sold 26,850.88
Under Applied Overhead
To dispose the under/(over) applied overhead assuming the value is significant
Cost of Goods Sold
Finished Goods Invty. allocation base on the FOH balances of each account
Work in Process
Under Applied Overhead

COGS FG WIP
DM
DL
FOH
Total
 Plantwide
FOH Rate = Est. (Bud) OH Cost / Est. (Bud) Base

Departmentalize

Activity Based Costing

Base for OH rate

Direct Labor Costs
Direct Labor Hours
Machine Hours
Units of Production
2,375.00 Direct Materials Costs

Distribute OH = Fixed OH and Variable OH

per unit (280,000 - 250,000) / (30,000 - 24,000) 5

280,000 - (30,000 X 5) 130,000.00

Units
272,500.00
2,375.00
114.74
/Unit

252,500.00

229,473.68
23,026.32

252,500.00

26,850.88
26,850.88
Ferry Company has three service departments, Purchasing, Bldg Maintenance and Human Resources, and two producing dep
The following data have been estimated for next year’s operations:

Total Overhead Square Machine Estimated

Department: Charges Footage Hours Acquisitions
Purchasing 85,000 200 -- 50,000
Human Resources 135,000 300 -- 75,000
Bldg Maintenance 100,000 100 -- 35,000
Machining 275,000 1,800 25,000 1,785,000
Assembly 225,000 2,700 1,000 2,105,000

Ferry’s applies overhead to the production using machine hours for Machining and labor hours for assembly.

Required:
Compute for the Factory Overhead Rate, assuming the company allocates service department costs using:
1.  Direct Method
2.  Step Method
3. Algebraic Method

Total Overhead Square Estimated No. of

Department: Charges Footage Acquisitions Employees
Purchasing 85,000
Human Resources 135,000
Bldg Maintenance 100,000
Machining 275,000 1,800 1,785,000 15
Assembly 225,000 2,700 2,105,000 30
4,500 3,890,000 45

Direct Method Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Purchasing 1785 : 2105 - 85,000.00
Human Resources 15 : 30 - 135,000.00
Bldg Maintenance 18 : 27 - 100,000.00
Total Costs - - -
Overhead Base
FOH rates

Total Overhead Square Estimated No. of

Department: Charges Footage Acquisitions Employees
Purchasing 85,000 200 3
Human Resources 135,000
Bldg Maintenance 100,000 2
Machining 275,000 1,800 1,785,000 15
Assembly 225,000 2,700 2,105,000 30
 4,700 3,890,000 50

STEP METHOD Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Human Resources 3 : 2 : 15 : 30 8,100.00 - 135,000.00 5,400.00
Bldg Maintenance 2 : 18 : 27 4,485.11 - 105,400.00
Purchasing 1785 : 2105 - 97,585.11
Total Costs - - -
Overhead Base
FOH rates

Service Provided By
Total Overhead Building Building Purchasing
Department: Charges Maintenance Maintenance
Purchasing 85,000 200.00 4.00%
Human Resources 135,000 300.00 6.00% 75,000.00
Bldg Maintenance 100,000 35,000.00
Machining 275,000 1,800.00 36.00% 1,785,000.00
Assembly 225,000 2,700.00 54.00% 2,105,000.00
5,000.00 100.00% 4,000,000.00

Service Provided By
Total Overhead (B) Building
Department: Charges Maintenance
Purchasing = 85,000 + 4.00%
Human Resources = 135,000 + 6.00% +
Bldg Maintenance = 100,000 +
Machining 275,000 36.00%
Assembly 225,000 54.00%
Formulate the equations 100.00%
Eq1: P = 85,000 + 4%B + 6%H
Eq2: H = 135,000 + 6%B + 1.875%P
Eq3: B = 100,000 + 0.875%P + 4%H

Substitute Eq2 to Eq1 to form Eq4 B

P = 85,000 + 4%B + 6% [135,000 + 6%B + 1.875%P] 8100 0.3600%
P = 93,100 + 4.36%B +0.1125%P
99.8875%P = 93,100 + 4.36%B Eq4

Substitute E2 to E3 to form Eq5 B

B = 100,000 + 0.875%P + 4%[135,000 + 6%B + 1.875%P] 5,400.00 0.2400%
100,000.00
B = 105,400 + 0.95%P + 0.24%B 105,400.00
-0.95%P = 105,400 - 99.76%B Eq5 99.7600%
Solve Eq4 and Eq5 simultaneously to compute for P P
99.8875%P = 93,100 + 4.36%B 99.89% 93100
-0.95%P = 105,400 - 99.76%B -0.95% 105400

99.647770% 92,876.56
-0.041420% 4,595.44
99.60635%P = 97,472 99.606350% 97,472.00
P= 97,857.21

Subtitute the value of P to Eq5 to solve for B

-0.95%P = 105,400 - 99.76%B
99.76%B = 105,400 + 0.95%P 929.643541802 106,329.64
99.76%B = 106,329.64
B= 106,585.45

Subtitute the values of P and B to Eq2 to solve for H

H = 135,000 + 6%B + 1.875%P
H= 143,229.95

ALGEBRAIC METHOD Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Human Resources 3 : 2 : 15 : 30 8,593.80 - 143,229.95 5,729.20
Bldg Maintenance 2 : 3 : 18 : 27 4,263.42 6,395.13 - 106,585.45
Purchasing 75 : 35 : 1785 : 2105 - 97,857.21 1,834.82 856.25
Total Costs - - -
Overhead Base
FOH rates
esources, and two producing departments, Machining and Assembly.

Labor No. of
Hours Employees
-- 3
-- 5
5,000 2
20,000 15
25,000 30

rs for assembly.

t costs using:

Machining Assembly
275,000.00 225,000.00

39,003.86 45,996.14
45,000.00 90,000.00
40,000.00 60,000.00
399,003.86 420,996.14
25,000.00 25,000.00
15.96 16.84
/MHr /DLHr
 Machining Assembly
275,000.00 225,000.00

40,500.00 81,000.00 -
40,365.96 60,548.94 -
44,778.77 52,806.34 -
400,644.73 419,355.27
25,000.00 25,000.00
16.03 16.77
/MHr /DLHr

e Provided By
Purchasing Human Human
Resources Resources
3.00 6.00%
1.8750%
0.8750% 2.00 4.00%
44.6250% 15.00 30.00%
52.6250% 30.00 60.00%
100.0000% 50.00 100.00%

Service Provided By
(P) Purchasing (H) Human
Resources
+ 6.00%
1.8750%
0.8750% + 4.00%
44.6250% 30.00%
52.6250% 60.00%
100.0000% 100.00%

P
0.11250%
99.88750%

P
0.0750%
0.8750%
0.9500%
B
4.36% 99.76%
-99.76% 4.36%

4.34953600%
-4.34953600%
0.00000000%

Machining Assembly
275,000.00 225,000.00

42,968.98 85,937.97 -
38,370.76 57,556.14 0.00
43,668.78 51,497.36 -
400,008.53 419,991.47
25,000.00 25,000.00
16.00 16.80
/MHr /DLHr
Ferry Company has three service departments, Purchasing, Bldg Maintenance and Human Resources, and two producing dep
The following data have been estimated for next year’s operations:

Total Overhead Square Machine Estimated

Department: Charges Footage Hours Acquisitions
Purchasing 85,000 200 -- 50,000
Human Resources 135,000 300 -- 75,000
Bldg Maintenance 100,000 100 -- 35,000
Machining 275,000 1,800 25,000 1,785,000
Assembly 225,000 2,700 1,000 2,105,000

Ferry’s applies overhead to the production using machine hours for Machining and labor hours for assembly.

Required:
Compute for the Factory Overhead Rate, assuming the company allocates service department costs using:
1.  Direct Method
2.  Step Method
3. Algebraic Method

Total Overhead Square Estimated No. of

Department: Charges Footage Acquisitions Employees
Purchasing 85,000
Human Resources 135,000
Bldg Maintenance 100,000
Machining 275,000 1,800 1,785,000 15
Assembly 225,000 2,700 2,105,000 30
4,500 3,890,000 45

Direct Method Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Purchasing 1785 : 2105 - 85,000.00
Human Resources 15 : 30 - 135,000.00
Bldg Maintenance 18 : 27 - 100,000.00
Total Costs - - -
Overhead Base
FOH rates

Total Overhead Square Estimated No. of

Department: Charges Footage Acquisitions Employees
Purchasing 85,000 200 3
Human Resources 135,000
Bldg Maintenance 100,000 2
Machining 275,000 1,800 1,785,000 15
Assembly 225,000 2,700 2,105,000 30

STEP METHOD Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Human Resourc 3 : 2 : 15 : 30 8,100.00 - 135,000.00 5,400.00
Bldg Maintenan 2 : 18 : 27 4,485.11 - 105,400.00
Purchasing 1785 : 2105 - 97,585.11
Total Costs - - -
Overhead Base
FOH rates

Service Provided by
Total Overhead Bldg
Department: Charges Maintenance
Purchasing = 85,000 + 4.0000%
Human Resources = 135,000 + 6.0000% +
Bldg Maintenance = 100,000 +
Machining 275,000 36.0000%
Assembly 225,000 54.0000%
Total 100.0000%
P = Purchasing; B = Bldg Maintenance ; H = Human Resources
Eq1: P = 85,000 + 4%B + 6%H
Eq2: H = 135,000 + 6%B +1.875%P
Eq3: B = 100,000 + 0.875%P + 4%H

Substitute Eq2 to Eq1 to form Eq4

P = 85,000 +4%B + 6% [135,000 + 6%B + 1.875%P] 8100 0.3600%
P = 93,100 + 4.36%B + 0.1125%P
99.8875%P = 93,100 + 4.36%B Eq4 B= 97747.1255598

Substitute Eq2 to Eq3 to form Eq5 B

B = 100,000 + 0.875%P + 4%[135,000 + 6%B +1.875%P] 5400 0.2400%
B = 105,400 + 0.95%P + 0.24%B
99.76%B = 105,400 + 0.95%P Eq5 -0.95%P = 105,400 - 99.76%B

Solving to equation simultaneously to solve P

99.8875%P = 93,100 + 4.36%B 0.998875 P
-0.95%P = 105,400 - 99.76%B -0.0095 P

0.9964777 P
-0.0004142 P
0.9960635 P
P=
Substitute the value of P to Eq5 to solve for B
99.76%B = 105,400 + 0.95% [97,857.21] 929.643541802
B= 106,585.45
Substitute P and B to Eq2 to solve for H
H= 143,229.95

ALGEBRAIC METHOD Purchasing Human Res. Bldg Maint.

Budgeted Costs 85,000.00 135,000.00 100,000.00
Allocation of Service Dept. Costs
Human Resourc 3 : 2 : 15 : 30 8,593.80 - 143,229.95 5,729.20
Bldg Maintenan 2 : 3 : 18 : 27 4,263.42 6,395.13 - 106,585.45
Purchasing 75 : 35 : 1785 : 2105 - 97,857.21 1,834.82 856.25
Total Costs - - -
Overhead Base
FOH rates

Total Overhead Square Machine Estimated

Department: Charges Footage Hours Acquisitions
Purchasing 85,000 200 --
Human Resources 135,000 300 -- 75,000
Bldg Maintenance 100,000 -- 35,000
Machining 275,000 1,800 25,000 1,785,000
Assembly 225,000 2,700 1,000 2,105,000
5000 4,000,000
esources, and two producing departments, Machining and Assembly.

Labor No. of
Hours Employees
-- 3
-- 5
5,000 2
20,000 15
25,000 30

rs for assembly.

t costs using:

Machining Assembly
275,000.00 225,000.00

39,003.86 45,996.14
45,000.00 90,000.00
40,000.00 60,000.00
399,003.86 420,996.14
25,000.00 25,000.00
15.96 16.84
/MHr /DLHr
 Machining Assembly
275,000.00 225,000.00

40,500.00 81,000.00 -
40,365.96 60,548.94 -
44,778.77 52,806.34 -
400,644.73 419,355.27
25,000.00 25,000.00
16.03 16.77
/MHr /DLHr

Service Provided by
Human
Purchasing Resources
+ 6.0000%
1.8750%
0.8750% + 4.0000%
44.6250% 30.0000%
52.6250% 60.0000%
100.0000% 100.0000%

0.11250%

4647.12555977 106,585.45

P
0.07500%

93,100.00 0.0436 B 0.9976

105,400.00 -0.9976 B 0.0436

92,876.56 0.04349536 B
4,595.44 -0.04349536 B
97,472.00 0
97,857.21
Machining Assembly
275,000.00 225,000.00

42,968.98 85,937.97 -
38,370.76 57,556.14 -
43,668.78 51,497.36 -
400,008.53 419,991.47
25,000.00 25,000.00
16.00 16.80
/MHr /DLHr

Labor No. of
Hours Employees
-- 3
--
5,000 2
20,000 15
25,000 30
50