17-37PGB - Horngren'S Financial And Managerial Accounting

Question

Elegant Woods manufactures jewelry boxes. The primary materials (wood, brass, and glass) and direct labor are assigned directly to the products. Manufacturing overhead costs are allocated based on machine hours. Data for 2018 follow:

	Estimated	Actual
Machine hours	24,500 hours	32,200 hours
Maintenance labor (Repairs to equipment)	\(19,000	\)27,500
Plant supervisor’s salary	41,000	46,000
Screws, nails, and glue	21,000	41,000
Plant utilities	42,000	97,850
Freight out	39,000	44,500
Depreciation on plant and equipment	83,800	82,000
Advertising expenses	46,000	60,000

Requirements

1. Compute the predetermined overhead allocation rate. Round to two decimal places.

2. Post actual and allocated manufacturing overhead to the Manufacturing Overhead T-account.

3. Prepare the journal entry to adjust for underallocated or overallocated overhead.

4. The predetermined overhead allocation rate usually turns out to be inaccurate.

Why don’t accountants just use the actual manufacturing overhead rate?

Step-by-Step Solution

Answer

1. The predetermined overhead allocation rate of the company is $11.91.

 

2. Manufacturing overhead T-Account

Particulars	Amount ($)	Particulars	Amount ($)
Maintenance labor	27,500	Work-in-process inventory	383,502
Plant supervisor’s salary	46,000
Screws, nails, and glue	41,000
Plant utilities	97,850
Freight out	44,500
Depreciation on plant and equipment	82,000
Advertising expenses	60,000
Balance (Underallocated)	15,348

 

3. Journal entry to record the under allocated manufacturing overhead

Date	Particulars	Amount ($)	Amount ($)
	Cost of goods sold	15,348
	Manufacturing overhead		15,348
	(Record the underallocated manufacturing overhead)

 

 

4. The predetermined overhead allocation rate normally becomes inaccurate because it is based on estimated figures. And the estimation is based on situations in which the estimation was made.

The accountant cannot use the actual manufacturing overhead rate because the predetermined overhead allocation rate is determined before starting the manufacturing process.

Meaning of Manufacturing Overheads

Manufacturing overhead is the total of all the indirect expenses incurred in manufacturing the products. It is included while computing the cost of final products

Predetermined overhead allocation rate

Particulars	Amount ($)
Maintenance labor (repair to equipment)	19,000
Plant supervisor’s salary	41,000
Screws, nail, and glue	21,000
Plant utilities	42,000
Freight out	39,000
Depreciation on plant and equipment	83,800
Advertising expenses	46,000
Total	291,800

The calculation of the predetermined overhead allocation rate is as follows:

$$\begin{gathered} \text{Predetermined overhead alocation rate} = \frac{\text{Estimated overhea}d}{\text{Estimated Machine hours}} \\ =\frac{\$291.800}{24.500} \\ =\$11.91 \end{gathered}$$

Allocated manufacturing overhead

$$\begin{gathered} Allocated Manufacturing overhead = Predetermind overhead Allocation Rate\times Actual Machine hours \\ = \$11.91\times 32,200 \\ =\$383,502 \end{gathered}$$

Total actual overhead cost

Particulars	Amount ($)
Maintenance labor (repair to equipment)	27,500
Plant supervisor’s salary	46,000
Screws, nail, and glue	41,000
Plant utilities	97,850
Freight out	44,500
Depreciation on plant and equipment	82,000
Advertising expenses	60,000
Total	398,850

Underallocated manufacturing overhead

$$\begin{gathered} \text{Under Allocated overhead= Actual overhead-Allocated overhead} \\ =\$398,850-\$383,502 \\ =\$15,348 \end{gathered}$$

Recording the underallocation of manufacturing overhead

The underallocated manufacturing overhead is recorded by debiting the cost of goods sold account and credting the manufacturing overhead account.

Predetermined overhead allocation rate

The predetermined overhead allocation rate is calculated at the beginning of the manufacturing process. The company cannot wait until the production is completed for product cost information because they must have an understanding of how much each product costs. Hence, the company is not able to compute the most accurate rate.