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Predetermined overhead rate and under applied overhead

Case 1 ("Predetermined Rate")

Hoy Heating and Air Conditioning Company repairs heating and cooling equipment. Each time a service technician completes a job, a time sheet is turned in and the job cost is computed. The company calculates the cost of each job by adding the cost of any materials used on the job, the labor cost of the service technician, and an overhead charge to cover administrative and support expenses. Hoy uses an estimated cost of support expenses in its calculation. Why do you think the company uses predetermined rates rather than actual costs in computing the costs of each service call?

Case 2 ("Underapplied Overhead")

Assume fuel oil represents a significant overhead cost of manufacturing company. Because of unexpected price increases in the cost per barrel, the company underapplied its overhead cost for the year. How might management have adapted to the change in prices to prevent a large amount of underapplied overhead?

Solution Preview

Predetermined overhead rate = Budgeted yearly total overhead cost/Budgeted yearly activity

Hoy uses estimated cost of each service call.Each job is unique and the supporting services are engaged permanently to support each job .However,materials and labor are incurred exclusively and ...

Solution Summary

The answer contains the circumstances in which predetermined overhead rate will be applied and the meaning of underapplied overhead.