9.2 Overhead Allocation and Normal Costing Flashcards
The two most appropriate factors for budgeting manufacturing overhead expenses are
Management judgement and production volume
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
practical capacity
__________ 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
Practical capacity
Using _________ capacity assumes no downtime, an unrealistic assumption in any case.
Maximum capacity
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
D. Management judgement and production volume
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
A. Practical capacity
If the amount of over- or underapplied overhead is considered material, it should be allocated based on the relative values of
Work-in-process inventory, finished goods inventory, and cost of goods sold
If the amount of over- or underapplied overhead is considered immaterial, it can be closed directly to
cost of goods sold
Overapplied - decrease COGS
underapplied - increase COGS
Actual costing
Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted
Direct materials: actual
Direct labor: actual
Manufacturing Overhead: actual
Normal Costing
Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted
Direct materials: actual
Direct labor: actual
Manufacturing Overhead: budgeted
Extended Normal Costing
Direct materials: actual/budgeted
Direct labor: actual/budgeted
Manufacturing Overhead: actual/budgeted
Direct materials: budgeted
Direct labor: budgeted
Manufacturing Overhead: budgeted
The departmental overhead allocations are determined by
Proportion of the total driver expended by each department on this job
A company uses a normal costing system and a predetermined overhead rate to allocate its overhead costs. The manufacturing process requires the use of machining equipment, which is a primary driver of overhead. The actual factory overhead amount is $450 for Department A, Job 120 as of the end of the year. Production costs are shown below.
*Estimated annual overhead for all departments $220,000
*Expected annual machine hours for all departments 20,000
*Actual machine hours for Department A, Job 120: 32
*Actual labor hours for Department A, Job 120: 21
The overhead cost for Department A, Job 120 is
$98 underapplied
The company applies overhead based on machine hours.
The rate is 11 (220,000 estimated annual overhead / 20,000 expected annual machine hours). Thus, the actual applied overhead is $352 (32 actual machine hours x 11).
The amount of underapplied overhead is $98. ($450-$352)
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
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)
