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Chapter 17: Q19RQ. (page 938)

Question: Explain the difference between underallocated overhead and overallocated overhead. What causes each situation?

Short Answer

Expert verified

Answer:

Underallocated overhead occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs. Overallocated overhead occurs when actual manufacturing overhead costs are less than allocated manufacturing costs. This is caused by the fact that overhead is allocated using a predetermined overhead allocation rate that is based on estimates.

Step by step solution

01

Underallocated overheads

When the company incurs manufacturing overhead which are more than the allocated manufacturing overhead cost, then it is treated as the underallocated overheads. It is due to the allocation rate which is based on the estimated data.

02

Overallocation overheads

When a company incurs less manufacturing overhead in comparison of the allocated manufacturing overhead, then this situation is called as the overallocation of the overheads. This difference between the actual overhead expense and the allocated overhead expense is due to the predetermined overhead allocation rate which is computed by using the estimated allocation base.

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Most popular questions from this chapter

Question: Give the journal entry for raw materials purchased on account. Explain how this transaction affects the accounting equation.

Meadow Construction, Inc. is a home builder in Arizona. Meadow uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:

a. Purchased materials on account, \(450,000.

b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.

Direct material

Direct Labor

House 402

\)52,000

\(47,000

House 403

67,000

36,000

House 404

63,000

54,000

House 405

88,000

52,000

c. The company incurred total wages of \)240,000. Use the data from Item b to

assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,300.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)40,000; Worker liability insurance expired, \(5,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold on account: 404 for \)250,000.

Requirements

1. Calculate Meadow鈥檚 predetermined overhead allocation rate for the year.

2. Prepare journal entries to record the events in the general journal.

3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.

Post the appropriate entries to these accounts, identifying each entry by letter.

Determine the ending account balances, assuming that the beginning balances

were zero.

4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.

5. Add the cost of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.

6. Compute gross profit on the house that was sold. What costs must gross profit

cover for Meadow Construction?

June production generated the following activity in Bentley Chassis Company鈥檚 Work-in-Process Inventory account:

June 1 balance

\(36,000

Direct materials used

32,000

Direct labor assigned to jobs

40,000

Manufacturing overhead allocated to jobs

28,000

Additionally, Bentley Chassis has completed Jobs 142 and 143, with total costs of

\)37,000 and $48,000, respectively.

Requirements

1. Prepare the journal entry for production completed in June.

Question: What types of companies use job order costing systems?

Superior Construction, Inc. is a home builder in Arizona. Superior uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:

a. Purchased materials on account, \(400,000.

b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.

Direct material

Direct Labor

House 402

\)58,000

\(44,000

House 403

62,000

32,000

House 404

61,000

58,000

House 405

86,000

57,000

c. The company incurred total wages of \)300,000. Use the data from Item b to assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,700.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)30,000; Worker liability insurance expired, \(7,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold on account: 404 for \)250,000.

Requirements

1. Calculate Superior鈥檚 predetermined overhead allocation rate for the year.

2. Prepare journal entries to record the events in the general journal.

3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.

Post the appropriate entries to these accounts, identifying each entry by letter.

Determine the ending account balances, assuming that the beginning balances

were zero.

4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.

5. Add the costs of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.

6. Compute gross profit on the house that was sold. What costs must gross profit

cover for Superior Construction?
See all solutions

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