6 Questions
What are budgeted overhead application rates?
Estimates used to apply overhead based on actual events.
How is total budgeted factory overhead calculated?
By multiplying the budgeted overhead application rates by the total budgeted amount of the cost driver.
What cost-allocation bases does Enriquez Machine Parts Company select for applying overhead?
Machine hours in machining and direct labor in assembly.
How is total overhead applied to a particular product calculated?
By multiplying the budgeted overhead rates by the actual machine hours or labor cost used by that product.
If Enriquez used 70,000 machine hours in machining, how much overhead was applied?
$280,000
If Enriquez incurred $190,000 in direct labor cost, how much overhead was applied to assembly?
$95,000
Study Notes
Budgeted Overhead Application Rates
- Budgeted overhead rates are estimates used to apply overhead based on actual events.
- The budgeted overhead application rate is calculated by dividing total budgeted factory overhead by the total budgeted amount of the cost driver.
Illustration of Overhead Application
- Enriquez Machine Parts Company uses a single cost-allocation base in each department for applying overhead:
- Machine hours in machining
- Direct-labor hours in assembly
- Total overhead applied to a product equals budgeted overhead rates multiplied by actual machine hours (MH) or labor cost (LC) used by that product.
- Example: A product that uses 6 MH in machining and incurs direct-labor cost of $40 in assembly would have $44 of overhead applied:
- Machining: 6 MH x $4 per MH = $24
- Assembly: $40 of DL cost x 50% = $20
- Total overhead = $24 + $20 = $44
Application of Overhead
- If Enriquez had used 70,000 machine hours in Machining, the total overhead applied to Machining would be:
- 70,000 MH x $4 per MH = $280,000
- If Enriquez had incurred $190,000 in direct labor cost, the total overhead applied to Assembly would be:
- $190,000 of DL cost x 50% = $95,000
Test your knowledge on budgeted overhead application rates and their importance in estimating and applying overhead costs in manufacturing. This quiz covers the concept of budgeted overhead application rates and their usage in allocating overhead expenses.
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