Response to the following problem:
Lakeland Industries operates two factories. The manufacturing operation of Factory 1 is machine intensive, while the manufacturing operation of Factory 2 is labor intensive. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:
| |
Factory 1 |
Factory 2 |
|
Estimated factory overhead cost for fiscal year
|
|
|
|
beginning January 1
|
$560,000
|
$1,750,000
|
|
Estimated direct labor hours for year
|
|
200,000
|
|
Estimated machine hours for year
|
17,500
|
|
|
Actual factory overhead costs for January
|
$ 28,000
|
$ 150,500
|
|
Actual direct labor hours for January
|
|
17,400
|
|
Actual machine hours for January
|
850
|
|
a. Determine the factory overhead rate for Factory 1.
b. Determine the factory overhead rate for Factory 2.
c. Determine the factory overhead applied to production in each factory for January.
d. Determine the balances of the factory accounts for each factory as of January 31, and indicate whether the amounts represent overapplied or underapplied factory overhead.
e. Explain why Factory 1 might use machine hours to allocate factory overhead while Factory 2 uses direct labor hours.