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CFO memo: predetermined overhead rates, applied overhead

Data for month ending 1/31/200X
Direct labor expended on jobs completed in month 1 $100,000
Direct material used up $500,000
Budgeted manufacturing overhead $2,000,000
Budgeted production volume 4,000 units
Actual production volume 4,500 units
Supplies, indirect labor, maintenance repair costs totaled $2,200,000
Beginning work in process inventory 0
Ending work in process inventory 0

You, the CFO, and the rest of the accounting department now need to write a memo summarizing the data from the first month of using the process costing system operation.
Using only the data above, prepare a 300-400-word memo addressing all of these questions and showing all calculations:
Why is calculating the predetermined overhead rate so important?
Compute the firm's predetermined overhead rate.
What would it mean if you mistakenly used too high a predetermined rate? What would it mean if you mistakenly used too low a predetermined rate?
Compute the proper amount of overhead to apply.
Compute the over- or under applied overhead.
Prepare the journal entries to record the closing-out of the balance in manufacturing overhead to the appropriate accounts, and show any necessary calculations in the notes of the journal entry.

Solution Preview

Why is calculating the predetermined overhead rate so important?

Overhead is rarely a function of a specific job. So, it is hard to directly associate overhead with the product or job. Think about the production manager. His work benefits all the jobs. So, how should those costs be shared among the jobs? Evenly? Based on percent of sales? Based on labor hours? Firms decide what activity (cost driver) will be used to spread shared overhead costs to the products or jobs. The predetermined overhead rate is the "ala carte overhead cost" that will be assigned based on the ...

Solution Summary

Your discussion is 384 words plus five schedules in Excel to illustrate the procedures.

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