Duggan Company Applies Manufacturing Overhead To Jobs

Duggan Company Applies Manufacturing Overhead To Jobs On The Basis Of

Duggan Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $339,390 for the year, and machine usage is estimated at 125,700 hours. For the year, $359,598 of overhead costs are incurred and 131,600 hours are used. (a) Your answer is incorrect. Try again. Compute the manufacturing overhead rate for the year. (Round answers to 2 decimal places, e.g. 1.25.) Manufacturing overhead rate $ [removed] per machine hour.

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Introduction

In cost accounting, manufacturing overhead refers to the indirect costs associated with production that are not directly traceable to a specific product. It includes expenses such as utilities, depreciation, maintenance, and factory supplies. Proper allocation of these costs to individual jobs or products is vital for accurate product costing, pricing, and financial analysis. One common method involves applying manufacturing overhead based on a predetermined rate, often related to a specific cost driver such as machine hours. This paper discusses the process of calculating the manufacturing overhead rate, exemplified through Duggan Company's scenario, analyzing the importance of accuracy in this calculation and implications for managerial decision-making.

Understanding Manufacturing Overhead Allocation

Manufacturing overhead allocation begins with estimating total overhead costs and selecting an appropriate cost driver. The predetermined overhead rate is then computed by dividing estimated overhead costs by the estimated level of activity related to the cost driver (Drury, 2018). Once established, this rate is applied to actual activity levels during production to assign overhead costs to jobs or products.

The formula for calculating the predetermined manufacturing overhead rate is:

\[ \text{Overhead Rate} = \frac{\text{Estimated Overhead Costs}}{\text{Estimated Activity Level}} \]

In Duggan's case, the relevant activity driver is machine hours.

Calculating Duggan Company's Overhead Rate

Given Data:

- Estimated Overhead Costs = $339,390

- Estimated Machine Hours = 125,700 hours

Using the formula:

\[ \text{Overhead Rate} = \frac{339,390}{125,700} = 2.698 \]

Rounded to two decimal places, the overhead rate is:

\[ \boxed{\$ 2.70 \text{ per machine hour}} \]

This rate indicates that for every machine hour used in production, Duggan Company applies $2.70 of manufacturing overhead.

Discussion of Actual Overhead and Activity

During the year, actual overhead costs incurred amounted to $359,598, and the machine hours used were 131,600. These actual figures differ from estimates, highlighting the importance of variance analysis for managerial control (Kaplan & Anderson, 2004). Variance analysis helps managers understand whether overheads were over- or under-applied, guiding decisions to improve cost accuracy and operational efficiency.

The applied overhead based on actual activity is calculated by:

\[ \text{Applied Overhead} = \text{Overhead Rate} \times \text{Actual Machine Hours} \]

\[ = 2.70 \times 131,600 = \$355,320 \]

The difference between actual overhead and applied overhead, known as over- or under-applied overhead, is:

\[ \text{Over- or Under-applied Overhead} = 359,598 - 355,320 = \$4,278 \]

An over-applied overhead indicates that the company allocated more overhead costs to jobs than actually incurred, calling for adjustments in financial reports and cost control measures.

Implications for Management

Accurate overhead rates are crucial as they directly impact product costing, pricing strategies, and profitability analysis (Garrison et al., 2018). Over- or under-applied overheads can distort cost information, leading to poor decisions. Companies should regularly review and update their overhead rates based on actual costs and activities.

Furthermore, variability in actual overhead costs and machine hours underlines the need for flexible cost systems and the potential adoption of activity-based costing (ABC) to improve cost accuracy (Kaplan & Anderson, 2007). ABC assigns costs more precisely by analyzing activities associated with cost objects, providing better insights for managerial decisions.

Conclusion

Calculating and applying the correct manufacturing overhead rate is fundamental in cost management and financial reporting. For Duggan Company, the overhead rate based on estimated data is $2.70 per machine hour. Variations between estimated and actual costs accentuate the importance of diligent variance analysis and possible system refinements. Accurate overhead application supports strategic decision-making, cost control, and profitability analysis, contributing to effective management in manufacturing environments.

References

- Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.

- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.

- Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.

- Kaplan, R. S., & Anderson, S. R. (2007). Time-driven activity-based costing. Harvard Business Review, 85(11), 131-138.