Overhead application using a predetermined overhead rate; practical capacity versus normal volume: manufacturer Jane Statton, the accountant for Hobart Happy Critters Ltd is in the process of analysing the company’s overhead costs for November. She has gathered the following data for the month:
• Inventories, 1 November:
• Purchases of direct material and supplies:
• Direct material and supplies requisitioned for production:
• Production equipment costs:
• Other costs:
The job costing system used by the firm uses direct labour hours as the overhead cost driver, in November of the previous year. Statton had prepared the following budget for direct labour and manufacturing overhead costs for the coming year. The plant is capable of operating at 135 000 direct labour hours per year. However, Statton estimates that the normal usage is 120 000 hours in an average year.
During November the following jobs were completed:
(a) Job number 77: Small koalas.
(b) Job number 78: Large kangaroos.
1. Construct an Excel’ spreadsheet to:
(a) Calculate the predetermined overhead rate for the current year using as denominator volumes:
(i) Practical capacity.
(ii) Normal volume.
(b) Calculate the total cost of job number 77, using both overhead rates calculated in part (a).
(c) Calculate the amount of manufacturing overhead applied to job number 79 during November: using both overhead rates.
2. What was the total amount of manufacturing overhead applied during November, using both overhead rates?
3. Use your spreadsheet to:
(a) Calculate the actual manufacturing overhead incurred during November.
(b) Calculate the overapplied or underapplied overhead for November, using both overhead Explain the differences.
4. Which of these denominator volumes is likely to result in accurate estimates of product costs? Explain.