Chapter 10B

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Factory Overhead Rates and Account Balances

Prostheses Industries operates two factories. The manufacturing operations of Factory 1 are machine intensive, while the manufacturing operations of Factory 2 are labor intensive. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:

		Factory 1		Factory 2
Estimated factory overhead cost for fiscal
	year beginning August 1	$735,600		$996,600
Estimated direct labor hours for year				15,100
Estimated machine hours for year		24,520
Actual factory overhead costs for August		$58,730		$86,170
Actual direct labor hours for August				1,360
Actual machine hours for August		1,910

a. Determine the factory overhead rate for Factory 1. Round your answer to the nearest cent. $fill in the blank 1 per machine hour

b. Determine the factory overhead rate for Factory 2. Round your answer to the nearest cent. $fill in the blank 2 per direct labor hour

c. Determine the factory overhead applied to production in each factory for August.

Factory 1	$fill in the blank 3
Factory 2	$fill in the blank 4

d. Determine the balances of the factory overhead accounts for each factory as of August 31, and indicate whether the amounts represent (overapplied) or underapplied factory overhead.

Factory 1	$fill in the blank 5	overapplied/underappliedoverapplied
Factory 2	$fill in the blank 7	overapplied/underappliedunderapplied

e. Explain why Factory 1 uses machine hours to allocate factory overhead while Factory 2 uses direct labor hours. Factory overhead should be allocated using a base that is related to (causes) the overhead costs incurred. Factory 1 has a

labor-intensive/machine-intensive

manufacturing operation, and Factory 2 has a

labor-intensive/machine-intensive

manufacturing operation. Thus, Factory 1 uses machine hours, and Factory 2 uses direct labor hours to allocate factory overhead.

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Recording Direct Labor and Factory Overhead

Chamlee Industries Inc. manufactures recreational vehicles. Chamlee Industries uses a job order cost system. The time tickets from May jobs are summarized below.

Job 5-100	$8,960
Job 5-101	5,460
Job 5-102	6,720
Job 5-103	4,060
Factory supervision	2,450

Factory overhead is applied to jobs on the basis of a predetermined overhead rate of $40 per direct labor hour. The direct labor rate is $30 per hour.

a. Determine the total factory labor costs transferred to Work in Process and Factory Overhead for May. If required, round your answers to nearest dollar.

Factory labor costs transferred to Work in Process	$fill in the blank 1
Factory labor costs transferred to Factory Overhead	$fill in the blank 2

b. Determine the amount of factory overhead applied to production for May. If required, round your interim calculation and final answer to nearest dollar. $fill in the blank 3

c. Illustrate the effects of the factory overhead applied in (b) on the accounts and financial statements.

If no account or activity is affected, select "No effect" from the drop-down list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

		Balance Sheet
		Assets			=	Liabilities	+	Stockholders' Equity
		Accounts payableCashWork in processNo effect	+	Factory overheadFinished goodsWages payableNo effect	=	Accounts payableFinished goodsWages payableNo effect	+	Capital stockFinished goodsRetained earningsNo effect
		fill in the blank 8		fill in the blank 9		fill in the blank 10		fill in the blank 11
	Statement of Cash Flows					Income Statement
	FinancingInvestingOperatingNo effect	fill in the blank 13				Cost of merchandise soldSalesNet incomeNo effect		fill in the blank 15