Figure 4-1
The Foremost Company predicted factory overhead for 2016 and 2017 would be $120,000 for each year. The predicted activity for 2016 and 2017 were 30,000 and 20,000 direct labor hours, respectively. Additional data are as follows:
The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2016 and 2017 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
-Refer to Figure 4-1. When the annual estimated factory overhead rate is used, the gross profits for 2016 and 2017, respectively, are
A) $150,000 and $150,000.
B) $150,000 and $100,000.
C) $250,000 and $250,000.
D) $100,000 and $150,000.

Question

Figure 4-1
The Foremost Company predicted factory overhead for 2016 and 2017 would be $120,000 for each year. The predicted activity for 2016 and 2017 were 30,000 and 20,000 direct labor hours, respectively. Additional data are as follows:
  The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2016 and 2017 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
-Refer to Figure 4-1. When the annual estimated factory overhead rate is used, the gross profits for 2016 and 2017, respectively, are
A) $150,000 and $150,000. 
B) $150,000 and $100,000. 
C) $250,000 and $250,000. 
D) $100,000 and $150,000.

Quizplus · Accepted Answer

The annual estimated factory overhead rate is calculated by dividing the predicted factory overhead by the predicted activity level.

For 2016: 
Annual estimated factory overhead rate = $120,000 ÷ 30,000 direct labor hours = $4.00 per direct labor hour

Actual direct labor hours used = 20,000 
Actual factory overhead cost incurred = $120,000

Applied factory overhead = Actual direct labor hours used x Annual estimated factory overhead rate 
= 20,000 x $4.00 
= $80,000

Gross profit = Sales - (Cost of goods sold + Applied factory overhead) 
= $500,000 - ($200,000 + $80,000) 
= $220,000

For 2017: 
Annual estimated factory overhead rate = $120,000 ÷ 20,000 direct labor hours = $6.00 per direct labor hour

Actual direct labor hours used = 20,000 
Actual factory overhead cost incurred = $120,000

Applied factory overhead = Actual direct labor hours used x Annual estimated factory overhead rate 
= 20,000 x $6.00 
= $120,000

Gross profit = Sales - (Cost of goods sold + Applied factory overhead) 
= $400,000 - ($200,000 + $120,000) 
= $80,000

Therefore, the gross profits for 2016 and 2017 are $150,000 and $100,000, respectively. The correct answer is B.

Figure 4-1 The Foremost Company Predicted Factory Overhead for 2016 and 2017