Actual and Predetermined Overhead Rates:
Alllison's Engines, Which builds high performance auto engines for race cars, started operations on January 1, 2009. During the month, the following events occurred:
Materials costing $6,500 were purchased on account.
Direct materials costing $3,000 were placed in process.
A total of 380 direct labor hours was charged to individual jobs at a rate of $15 per hour.
Overhead costs for the month of January were as follow:
Depreciation on building and equipment ...........$500
Indirect labor.............................................. 1,500
Utilities..................................................... 600
Property taxes on building .............................. 650
Insurance on building ................................... 550
On January 31, only one job (A06) was in progress with materials cost of $600, direct labor charges of $450 for 30 direct labor hours, and applied overhead.
The building and equipment were purchased before operations began and the insurance was prepaid. All other cost will be paid during the following month.
Note: Predetermined overhead rates are used throughout the module. An alternative is to accumulate actual overhead cost for the period in Manufacturing Overhead, and apply actual costs at the close period to all jobs in process during the period.
Required:
1) Assuming Allison’s Engines assigned actual monthly overhead cost to jobs on the basis of actual monthly direct labor hours, prepare an analysis of work-in-process for the month of January.
2) Assuming Allison’s Engines uses a predetermined rate of $10.50 per direct labor hour, prepare an analysis of Work-in-Process for the month of January. Describe the appropriate treatment of any overapplied or underapplied overhead for the month of January.
3) Review the overhead items and classify each as fixed or variables in relation to direct labor hours. Next, predict the actual overhead rates for months when 200 and 1,000 direct labor hours are used. Assuming jobs similar to A06 were in process at the end of each month, determine the costs assigned to these jobs. (Hint: Determined a variable overhead rate.)
4) Why do you suppose predetermined overhead rates are preferred to actual overhead rates?