Here's a supporting problem example for this week's threads. In this thread I want to create and help you walk through an example problem to explain one of the most challenging concepts in job costing. This concept specifically involves calculating predetermined overhead rates (also known as overhead allocation rates) using different overhead allocation bases and also understanding how to calculate and interpret over-applied (over-allocated) versus under-applied (under-allocated) overhead.
Here's a fictitious set of data that I just made up, but we'll pretend it's for a real company that we work for and that our firm does a variety of manufacturing jobs for many different industrial customers that come to us with different job orders throughout the year. This is the pertinent factory data we'll need to know for our manufacturing company's 2016 fiscal year:
Budgeted Overhead = $10,000,000
Budgeted Labor Hours = 200,000 hours at an hourly rate of $20 per hour
Budgeted Machine Hours = 250,000 machine hours
Actual Overhead = $10,500,000
Actual Labor Hours (worked by production staff) = 180,000 hours
Let's all walk through the following series of questions together, in order and step by step, so please do not try to immediately answer all of these at once. We want to incrementally discuss each step of this multipart question along the way so that everyone can grasp what's happening. The first people to see this discussion can tackle the first question below, then subsequent people can move on to the next part and so on. I'll be regularly overseeing the comments to make sure everything is accurate and on track. Don't be concerned if you get something wrong when you post to one of the questions below...just explain your thoughts and show your work (if it's a calculation) and you'll still get full quality credit for your posting for contributing to this discussion. Several people can work on each question and provide multiple perspectives as we move through these, and don't be afraid to confirm or correct your classmates' postings on any part of this.
Q: Calculate the predetermined overhead rate (or overhead allocation rate) for each of the following different allocation bases, and be sure to completely show your work and also indicate the correct units for each answer:
a) Direct Labor Hours
b) Direct Labor Dollars
c) Machine Hours