Q31PGA - Horngren'S Financial And Managerial Accounting

Question

Prestige 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	27,000 hours	32,100 hours
Maintenance labor (Repairs to equipment)	\(17,000	\)23,500
Plant supervisor’s salary	48,000	50,000
Screws, nails, and glue	28,000	45,000
Plant utilities	44,000	92,850
Fright out	37,000	49,500
Depreciation on plant and equipment	85,400	83,000
Advertising expenses	46,000	53,000

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 $11.31.

 

2. Manufacturing overhead T-Account

Particulars	Amount ($)	Particulars	Amount ($)
Maintenance labor	23,500	Work-in-process inventory	363,051
Plant supervisor’s salary	50,000
Screws, nails, and glue	45,000
Plant utilities	92,850
Freight out	49,500
Depreciation on plant and equipment	83,000
Advertising expenses	53,000
Balance (Underallocated)	33,799

 

3. Journal entry to record the under-allocated manufacturing overhead

Date	Particulars	Amount ($)	Amount ($)
	Cost of goods sold	33,799
	Manufacturing overhead		33,799
	(Record the under-allocated manufacturing overhead)

 

 

4. Predetermined overhead allocation rate usually turns out to be inaccurate. It is so because the predetermined overhead allocation rate is based on estimated data, and the estimation of data is based on the current situation in which the estimation is made. Hence, the rate is not accurate. 

The accountant cannot use the actual manufacturing overhead rate; it is so because the rate is decided at the beginning of the year before incurring the actual expenses.

 

Step 1: Meaning of Overhead Cost

Overhead cost means all the indirect costs incurred while manufacturing products. Companies incur this cost for running the business. It does not include the direct cost associated with the production.

Step 2: Total estimated overhead cost

Particulars	Amount ($)
Maintenance labor (repair to equipment)	17,000
Plant supervisor’s salary	48,000
Screws, nail, and glue	28,000
Plant utilities	44,000
Freight out	37,000
Depreciation on plant and equipment	85,400
Advertising expenses	46,000
Total	305,400

Step 3: Predetermined overhead allocation rate

$\begin{array}{c}\mathrm{Predetermined} \mathrm{overhead} \mathrm{allocation} \mathrm{rate}=\frac{\mathrm{Estimated} \mathrm{overhead}}{\mathrm{Estimated} \mathrm{Machine} \mathrm{hours}}\\ =\frac{\mathrm{\$}305,400}{27,000}\\ =11.31\end{array}$

Step 4: Allocated manufacturing overhead

$\begin{array}{rcl}\mathrm{Allocated} \mathrm{Manufacturing} \mathrm{overhead}& =& \mathrm{Predetermined} \mathrm{overcation} \mathrm{Allocation} \mathrm{date} \times \mathrm{Actual} \mathrm{machine} \mathrm{hours}\\ & =& \$11.31\times 32,100\\ & =& \$ 363051\end{array}$

Step 5: Total actual overhead cost

Particulars	Amount ($)
Maintenance labor (repair to equipment)	23,500
Plant supervisor’s salary	50,000
Screws, nail, and glue	45,000
Plant utilities	92,850
Freight out	49,500
Depreciation on plant and equipment	83,000
Advertising expenses	53,000
Total	396,850

Step 6: Underallocated manufacturing overhead

$\begin{array}{c}\mathrm{Under} \mathrm{allocated} \mathrm{manufacturing} \mathrm{overhead}=\text{}\mathrm{Actual} \mathrm{overhead}-\mathrm{Allocate} \mathrm{overhead}\\ =\mathrm{\$}396,850-\mathrm{\$}363,051\\ =\mathrm{\$}33,799\end{array}$

Step 7: Recording the underallocation of manufacturing overhead

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

Step 8: Predetermined overhead allocation rate

The company determines the predetermined overhead allocation rate before starting the period. Hence, the company is unable to determine the most accurate allocation. Management cannot wait that long for the product cost information because it is important that they have an understanding of how much each product costs.