9.2 Overhead Allocation and Normal Costing

Question 1

In determining next year’s overhead application rates, a company desires to focus on manufacturing capacity rather than output demand for its products. To derive a realistic application rate, the denominator activity level should be based on

Answer 1

practical capacity

Question 2

__________ capacity is based on realistic, attainable levels of production and input efficiency and is the most appropriate denominator level to use in selecting an overhead application rate

Answer 2

Practical capacity

Question 3

Using _________ capacity assumes no downtime, an unrealistic assumption in any case.

Answer 3

Maximum capacity

Question 4

The two most appropriate factors for budgeting manufacturing overhead expenses are

A. Machine hours and production volume
B. Management judgement and sales dollars
C. Management judgment and contribution margin
D. Management judgement and production volume

Answer 4

D. Management judgement and production volume

Question 5

In determining next year’s overhead application rates, a company desires to focus on manufacturing capacity rather than output demand for its products. To derive a realistic application rate, the denominator activity level should be based on

A. Practical capacity
B. Master-budget (expected annual) capacity
C. Normal capacity
D. Maximum capacity

Answer 5

A. Practical capacity

Question 6

If the amount of over- or underapplied overhead is considered material, it should be allocated based on the relative values of

Answer 6

Work-in-process inventory, finished goods inventory, and cost of goods sold

Question 7

If the amount of over- or underapplied overhead is considered immaterial, it can be closed directly to

Answer 7

cost of goods sold

Overapplied - decrease COGS
underapplied - increase COGS

Question 8

Actual costing

Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted

Answer 8

Direct materials: actual
Direct labor: actual
Manufacturing Overhead: actual

Question 9

Normal Costing

Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted

Answer 9

Direct materials: actual
Direct labor: actual
Manufacturing Overhead: budgeted

Question 10

Extended Normal Costing

Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted

Answer 10

Direct materials: budgeted
Direct labor: budgeted
Manufacturing Overhead: budgeted

Question 11

A company applies factory overhead based upon machine hours. At the beginning of the year, the company budgeted factory overhead at $250,000 and estimated that 100,000 machine hours would be used to make 50,000 units of product. During the year, the company produced 48,000 units using 97,000 machine hours. Actual overhead for the year was $252,000. Under a standard cost system, the amount of factory overhead applied during the year was

A. $240,000
B. $252,000
C. $242,500
D. $250,000

Answer 11

A. $240,000

The company’s application rate for overhead is $2.50 per machine hour ($250,000 budgeted total / 100,000 machine hours), and each unit of output is estimated to require 2 machine hours (100,000 estimated machine hours / 50,000 units budgeted output). Under a standard cost system, the amount of overhead applied during the year was therefore $240,000 (48,000 units actual output x $2.50 per machine hour application rate x 2 machine hours standard per unit)

Question 12

A cost accountant is developing departmental factory overhead application rates for the company’s tooling and fabricating departments. The budgeted overhead for each department and the data for one job are shown below.

Department:
Tooling / Fabricating
Supplies: $ 850 / $ 200
Supervisor’s salaries: 1,500 / 2,000
Indirect labor: 1,200 / 4,880
Depreciation: 1,000 / 5,500
Repairs: 4,075 / 3,540
Total budgeted overhead: $8,625 / $16,120
Total direct labor hours: 460 / 620
Direct labor hours on Job #231: 12 / 3

Using the departmental overhead application rates, total overhead applied to Job #231 in the Tooling and Fabricating Departments will be

A. $671
B. $303
C. $225
D. $537

Answer 12

B. $303

The departmental overhead allocations are determined by the proportion of the total driver expended by each department on this job, as follows:

Tooling: 8,625 x (12/460) = 225
Fabricating: 16,120 x (3/620) = 78
Total = 303