Predetermined OCR Rate For 2010 Omaha Mechanical

13 Lo1 Predetermined Oh Rate For 2010 Omaha Mechanical Has A Mont

For 2010, Omaha Mechanical has a monthly overhead cost formula of $42,900 + $6 per direct labor hour. The firm’s expected annual capacity is 78,000 direct labor hours, to be incurred evenly each month. Making one unit of the company’s product requires 1.5 direct labor hours.

a. Determine the total overhead to be applied per unit of product in 2010.

b. Prepare journal entries to record the application of overhead to Work in Process Inventory and the incurrence of $128,550 of actual overhead in January 2010, when 6,390 direct labor hours were worked.

c. Given the actual direct labor hours in part (b), how many units would you have expected to be produced in January?

Paper For Above instruction

Omaha Mechanical’s overhead rate calculation and application are crucial for understanding cost control and financial reporting in manufacturing. This analysis will delve into their predetermined overhead rate, journal entries for overhead application, and expected production output based on actual labor hours, providing insights into effective cost management practices.

Introduction

In manufacturing cost accounting, the allocation of overhead costs is essential for determining product costs, setting pricing strategies, and evaluating operational efficiency. Omaha Mechanical, a firm utilizing a structured overhead application system, provides a practical case to explore the concepts of predetermined overhead rates, journal entry preparation, and output estimation.

Calculation of Predetermined Overhead Rate

Omaha Mechanical’s monthly overhead cost formula is given as $42,900 + $6 per direct labor hour. The expected annual capacity is 78,000 hours, with the hours evenly spread throughout the year, resulting in a monthly capacity of:

  • 78,000 hours / 12 months = 6,500 hours per month

The predetermined overhead rate (POHR) is calculated by dividing the estimated total overhead costs by the estimated total direct labor hours for the year:

  • Total estimated overhead cost = (Monthly fixed overhead) × 12 + (Variable overhead per hour) × total hours = ($42,900 × 12) + ($6 × 78,000) = $514,800 + $468,000 = $982,800
  • POHR = Total overhead / Total direct labor hours = $982,800 / 78,000 hours ≈ $12.60 per direct labor hour

This rate indicates the overhead cost assigned to each direct labor hour worked in 2010, which is vital for applying overhead to products and jobs accurately.

Part a: Overhead Per Unit Calculation

The cost of one unit involves 1.5 direct labor hours. Therefore, the overhead costs assigned per unit are calculated as:

Overhead per unit = POHR × labor hours per unit = $12.60 × 1.5 = $18.90

This means each product unit has an overhead component of $18.90, which helps in determining the total product cost and setting selling prices.

Part b: Journal Entries for Overhead Application and Actual Overhead

In January 2010, Omaha Mechanical incurred an actual overhead of $128,550, with 6,390 direct labor hours worked. The journal entries include:

  • To record the application of overhead to Work in Process (WIP):
Dr. Work in Process Inventory             $80,394


Cr. Manufacturing Overhead Applied            $80,394

Calculation for applied overhead:

Overhead applied = Predetermined overhead rate × Actual hours worked


= $12.60 × 6,390 = $80,394
  • To record actual overhead incurred:
Dr. Manufacturing Overhead                    $128,550


Cr. Accounts Payable / Cash               $128,550

This set of entries reflects the overhead allocated to WIP based on the predetermined rate, and the actual overhead expense incurred during the period.

Part c: Expected Units Produced in January

Given the actual labor hours of 6,390 hours in January, the expected number of units produced can be calculated as:

Units = Actual hours / Labor hours per unit = 6,390 / 1.5 = 4,260 units

This estimation helps in production planning and cost management, ensuring resource utilization aligns with capacity and demand forecasts.

Conclusion

The effective calculation and application of overhead costs, as demonstrated by Omaha Mechanical, are essential components of cost accounting that influence profitability and operational efficiency. An accurate predetermined overhead rate allows for appropriate product costing, while precise journal entries ensure proper financial reporting. Further, analyzing actual labor hours against production expectations aids in operational control and strategic decision-making.

References

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