Ch5 COST ALLOCATION - OVERHEAD COSTS Overhead all costs...

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OVERHEAD COSTS Overhead – all costs associated with producing inventory or providing service other than direct materials and direct labor; some overhead costs are variable, and some are fixed Overhead includes items such as: Factory rent Depreciation on factory or production equipment Indirect materials Indirect labor Factory utilities Property taxes on factory Maintenance costs Factory insurance Problems in dealing with overhead: 1. Overhead benefits many or all jobs, and cannot be easily and directly traced to any one particular job 2. Some overhead costs may not be known until the end of an accounting period. 3. Actual overhead costs and production levels may fluctuate during the year, which would cause fluctuations in the overhead rate if the actual rate were computed more frequently Predetermined overhead rate: 1. Single (plantwide) predetermined overhead rate estimated (budgeted) overhead predetermined rate = estimated level of activity applied overhead = predetermined rate x actual level of activity At the end of the year, the accounts are adjusted for any difference between actual overhead and applied overhead Example problem #1: At the beginning of 2001, Aggie Publishing made the following estimates regarding the coming year’s activities: Budgeted direct labor costs $ 98,000 Budgeted direct labor hours 24,500 hours Budgeted factory overhead costs $147,000 At the end of 2001, Aggie Publishing had the following information available: Actual direct labor wages paid $ 4.50 per hour Actual direct labor hours worked 23,000 hours Actual factory overhead costs $152,000 Required:
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a. Find the predetermined overhead rate, and the year-end amount of overapplied or underapplied overhead assuming Aggie allocates overhead based on direct labor hours. b.
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Ch5 COST ALLOCATION - OVERHEAD COSTS Overhead all costs...

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