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Show Me Haw Factory Overhead Rates, Entries, and Account Balance Sundance Solar Company operates two factories. The company applies factory overhead to obs on the basis of machine hours kfactory 1-nd o the basis of direct 4bor han i actory 2 Eathuted tactory e ertead ats, d et machine hours are as follows r han Factory 1 Estimated factory overhead cost for fiscal year beginning March 1 Estimated direct labor hours for year Estimated machine hours for year Actual factory overhead costs for March Actual direct labor hours for March Actual machine hours for March a. Determine the factory overhead rate for Factory . 12,900,000 $10,200,000 250,000 12,990,000 10,090,000 610,000 per machine hour b. Determine the factory overhead rate for Factory 2 per direct labor hour c. Journalize the entries to apply factory overhead to production le each factory for March Factory i work in Process □ Factory Overhead Factory 2 Werk in Process Factory Overhead d. Determine the balances of the factory overhead accounts for each factory as of March 31,and indicate whether the amounts Credit v Factory 1
Expert Answer
Solution:
Factory Overhead Rate (FOR)
– Factory Overhead Rate is the predetermined overhead rate which is used to apply manufacturing overhead to production department or products or job orders.
– Normally, it is calculated at the beginning of the period.
– It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).
– Allocation bases may be direct labor hours, direct labor costs, machine hours etc.
Mathematically, FOR is calculated as follows:
Factory Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base
Here in the question, allocation base for factory 1 is Machine Hours and factory 2 is direct labor hours.
(a)
Factory Overhead Rate for factory 1 = Estimated factory Overhead Cost for factory 1/ Estimated Machine Hours for factory 1
= 12,900,000 / 600,000 MHs
= $21.50 per machine hour
(b)
Factory Overhead Rate for factory 2 = Estimated factory Overhead Cost for factory 2 / Estimated Direct Labor Hours for factory 2
= 10,200,000 / 250,000 DLHs
= $40.80 per direct labor hour
c)
| Factory 1 (Refer note 1) | Work in process | 13,115,000 | |
| Factory Overhead | 13,115,000 | ||
| Factory 2 (refer note 2) | Work in process | 9,996,000 | |
| Factory Overhead | 9,996,000 |
Note 1 – Calculation of Applied Factory Overhead to production for Factory 1
Factory Overhead Rate (as calculated above) for factory 1 = $21.50 per machine hour
Actual Machine Hours used for March in factory 1= 610,000 MHs
Applied Factory Overhead = Actual Machine Hours Used x Factory Overhead Rate
= 610,000 MHs x $21.50 per MH
= $13,115,000
Note 2 – Calculation of Applied Factory Overhead to production for Factory 2
Factory Overhead Rate (as calculated above) for Factory 2 = $40.80 per direct labor hour
Actual Direct Labor Hours used for March in factory 2= 245,000 DLHs
Applied Factory Overhead = Actual Direct Labor Hours Used x Factory Overhead Rate
= 245,000 DLHs x $40.80 per direct labor hour
= $9,996,000
d)
Factory 1
Applied Factory Overhead = 13,115,000
Estimated Factory Overhead = 12,900,000
Applied Overheads are higher than Estimated Overheads, hence the Overheads are overapplied.
Over-applied Overhead = 13,115,000 – 12,900,000 = 215,000
Factory 2
Applied Factory Overhead = 9,996,000
Estimated Factory Overhead = 10,200,000
Applied Overheads are lesserr than Estimated Overheads, hence the Overheads are under-applied.
Under-applied Overhead = 10,200,000 – 9,996,000 = 204,000
| Factory 1 | 215,000 | Credit | Over applied |
| Factory 2 | 204,000 | Debit | Under Applied |
