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Yarra Fabrication estimates that its manufacturing overhead will be $2,348,800 in year 1. It further estimates that direct material costs will amount to $1,468,000. During July, Yarra worked on four jobs with actual direct materials costs of $77,000 for Job 0701, $108,000 for Job 0702, $140,000 for Job 0703, and $69,000 for Job 0704. Actual manufacturing overhead costs for the year were $2,485,000. Actual direct materials costs were $1,635,000. Manufacturing overhead is applied to jobs based on direct materials cost using predetermined rates. Required: A. How much overhead was applied to each of the four jobs, 0701, 0702, 0703, and 0704?B. What was the over- or underapplied manufacturing overhead for year 1?

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Answer:

predetermined overhead rate = $2,348,800 / $1,468,000 = 160% of direct materials

a) applied overhead rate to:

  • Job 0701 = $77,000 x 1.6 = $123,200
  • Job 0702 = $108,000 x 1.6 = $172,800
  • Job 0703 = $140,000 x 1.6 = $224,000
  • Job 0704 = $69,000 x 1.6 = $110,400

b) actual overhead rate = $2,485,000 / $1,635,000 = 152%

overhead cost that should have been applied:

  • Job 0701 = $77,000 x 1.52 = $07,040
  • Job 0702 = $108,000 x 1.52 = $164,160
  • Job 0703 = $140,000 x 1.52 = $212,800
  • Job 0704 = $69,000 x 1.52 = $104,880

Overhead costs were overapplied since real overhead was lower. The actual overhead rate was 1.52, while the predetermined rate was 1.6, so overhead costs were overapplied by 0.08 or 8%. Since total materials costs were $1,635,000, then overhead costs were overapplied by $1,635,000 x 0.08 = $130,800

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