Proposal to use applied estimated overhead, instead of actual overhead, for costing purposes

It has been proposed to the management to use applied estimated factory overhead, instead of the current actual overhead, for costing purposes. The Cost Accountant has recently gone for a course on Accounting for Overhead, and suggested a number of advantages for using pre-determined Factory Overhead application rate for product costing purposes.

For a start, the Cost Accountant suggested computing an estimated Factory Overhead Application Rate per quarter to be applied for all months in the quarter. Budgeted data for the fourth quarter is as follows:

	Dept-1	Dept-2
Production overhead costs	$352,800	$124,800
Direct labour hours	3,500	7,800
Machine hours	11,200	2,100

One of the sales orders transacted in November 20X2, Order #A1212, incurred the following direct labour and machine hours in the two production departments:

	Dept-1	Dept-2
Direct labour hours	25	28
Machine hours	46	8

Direct labour in both departments is paid at a basic rate of $8.00 per hour. 10% of the direct labour hours in the Dept-2 are overtime hours, paid at 150% of basic rate. As the customer has requested for RTS Limited to rush out the order, the overtime premium will be charged to the customer. Ignore all CPF contributions for application rate computation.
The request for Order #A1212 was to make 190 units of a product, with each unit requiring 1.08 kgs of prepared material. Loss on preparation is 10% of unprepared material. The unprepared material costs $2.35 per kg.
Based on a mark-up of 40%, the management is wondering what selling price will be set for Order #A1212 if applied factory overhead was used, instead of actual overhead.

(d) As the Cost Accountant of RTS Limited, briefly explain to the management three advantages of using applied estimated factory overhead, as supposed to actual overhead, for product costing purposes. Compute the overhead application rate for each department, briefly justifying your choice of base, and calculate the selling price for Order #A1212 assuming that the company uses applied factory overhead. 

Answer rating: 100% (QA)

Advantages of Using Applied Estimated Factory Overhead The primary advantages of using applied estimated factory overhead for product costing purposes ... View the full answer