Micro Enterprises planned to produce 120,000 lerts per year. Annual overheads, of which 32.5% are variable, are estimated at $320,400. Each lert takes 1.2 machine hours and 3 labor hours to produce. The firm allocates overhead by direct labor hours. In March, when 11,500 lerts were produced, 33,500 direct labor hours were recorded and expenditures on overheads amounted to $31,200. Which is true for this month?

Question

Quizplus · Accepted Answer

1) Calculate the predetermined overhead rate:
Annual overheads = $320,400
Variable overhead = 32.5% of $320,400 = $104,040
Fixed overhead = $320,400 - $104,040 = $216,360

Total direct labor hours required to produce 120,000 lerts:
1.2 machine hours + 3 labor hours = 4.2 hours per lert
Total direct labor hours = 120,000 lerts x 3 labor hours = 360,000 hours per year

Predetermined overhead rate = (Variable overhead + Fixed overhead) / Total direct labor hours
Predetermined overhead rate = ($104,040 + $216,360) / 360,000 hours
Predetermined overhead rate = $0.80 per direct labor hour

2) Calculate the allocated overhead for March:
Allocated overhead = Predetermined overhead rate x Actual direct labor hours
Allocated overhead = $0.80 x 33,500 hours
Allocated overhead = $26,800

3) Compare allocated overhead to actual overhead:
Overhead variance = Actual overhead - Allocated overhead
Overhead variance = $31,200 - $26,800
Overhead variance = $4,400 over-applied overhead

4) Convert the overhead variance to a per direct labor hour basis:
Overhead variance per direct labor hour = Overhead variance / Actual direct labor hours
Overhead variance per direct labor hour = $4,400 / 33,500 hours
Overhead variance per direct labor hour = $0.1313 per direct labor hour

5) Calculate under or over-applied overhead for March:
If the overhead variance is positive, it means overhead was over-applied (allocated overhead was more than actual overhead). If the overhead variance is negative, it means overhead was under-applied (allocated overhead was less than actual overhead).

Since the overhead variance was positive ($4,400), overhead was over-applied. We need to account for this over-applied overhead.

Over-applied overhead for March = Overhead variance per direct labor hour x Actual direct labor hours
Over-applied overhead for March = $0.1313 x 33,500 hours
Over-applied overhead for March = $4,400

Therefore, the answer is C - Under-applied overheads are $1,385. This is incorrect, as the overhead was actually over-applied. The correct answer should be D - Over-applied overheads are $1,385.

Micro Enterprises Planned to Produce 120,000 Lerts Per Year