The RideonWater Company (ROW) produces a line of non-motorised boats. ROW uses a normal costing system and allocates manufacturing overhead using direct manufacturing labour cost. The following data are for 2021Budgeted production volume (number of boats) 110Budgeted manufacturing overhead costs $121,000Budgeted direct manufacturing labour costs $220,000Actual production volume (number of boats) 95Actual manufacturing overhead costs $121,950Actual direct manufacturing labour costs $229,000Calculate the overhead allocation rate and the amount of under-or over allocation overhead costCorrect!
Question
The RideonWater Company (ROW) produces a line of non-motorised boats. ROW uses a normal costing system and allocates manufacturing overhead using direct manufacturing labour cost. The following data are for 2021Budgeted production volume (number of boats) 110Budgeted manufacturing overhead costs 220,000Actual production volume (number of boats) 95Actual manufacturing overhead costs 229,000Calculate the overhead allocation rate and the amount of under-or over allocation overhead costCorrect!
Solution
To calculate the overhead allocation rate, we need to divide the budgeted manufacturing overhead costs by the budgeted direct manufacturing labour costs.
So, Overhead allocation rate = Budgeted manufacturing overhead costs / Budgeted direct manufacturing labour costs = 220,000 = 0.55 or 55%
This means that for every dollar of direct manufacturing labour cost, an additional $0.55 is added for overhead costs.
Next, to calculate the amount of under- or over-allocated overhead cost, we need to compare the actual overhead costs with the overhead costs that were allocated based on the actual direct manufacturing labour costs.
First, calculate the allocated overhead costs: Allocated overhead costs = Overhead allocation rate * Actual direct manufacturing labour costs = 0.55 * 125,950
Then, compare this with the actual overhead costs: Under- or over-allocated overhead cost = Actual overhead costs - Allocated overhead costs = 125,950 = -$4,000
The negative sign indicates that the overhead was over-allocated. In other words, the company allocated more costs to overhead than it actually incurred, by $4,000.
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