Managerial Accounting

Question

Towering Inc. is a lumber company. The company owns two 20,000-acre plots of timber, and sells to construction suppliers. Towering uses ABC costing to better manage the company, and has accumulated the following information for last year:

Cost Pool Cost Driver Anticipated Cost Actual
Cost Anticipated Driver
Usage
Plot 1 Actual Driver Usage
Plot 1 Anticipated Driver
Usage
Plot 2 Actual Driver Usage
Plot 2
Equipment Depreciation Machine hours $5,000 $5,000 8,000 7,500 7,000 6,000
Fuel expenses Mileage driven $3,000 $3,300 10,000 9,000 8,000 12,000
Scheduling expenses Orders placed $50,000 $53,000 40 30 40 20
Meals and Lodging Nights away $4,000 $4,500 10 15 10 8

What is the amount of over- or under-applied overhead for the year?
Round to an even dollar amount only for the final computation of each cost pool.

Answer 1

To determine whether overhead is overapplied or underapplied, we need to compare the actual overhead costs with the overhead applied using the predetermined activity-based costing (ABC) rates.

Step 1: Calculate the predetermined overhead rate for each cost pool.

The formula is:

Predetermined overhead rate = Anticipated cost / Total anticipated cost driver usage

We combine the anticipated driver usage from both plots.

1. Equipment Depreciation

Anticipated cost = $5,000

Total anticipated machine hours = 8,000 + 7,000 = 15,000 hours

Overhead rate = $5,000 / 15,000 = $0.333333 per machine hour

Actual machine hours = 7,500 + 6,000 = 13,500 hours

Applied overhead = ($5,000 / 15,000) × 13,500

Applied overhead = $4,500

Actual cost = $5,000

Underapplied overhead = $5,000 - $4,500 = $500

2. Fuel Expenses

Anticipated cost = $3,000

Total anticipated mileage = 10,000 + 8,000 = 18,000 miles

Overhead rate = $3,000 / 18,000 = $0.166667 per mile

Actual mileage = 9,000 + 12,000 = 21,000 miles

Applied overhead = ($3,000 / 18,000) × 21,000

Applied overhead = $3,500

Actual cost = $3,300

Overapplied overhead = $3,500 - $3,300 = $200

3. Scheduling Expenses

Anticipated cost = $50,000

Total anticipated orders = 40 + 40 = 80 orders

Overhead rate = $50,000 / 80 = $625 per order

Actual orders = 30 + 20 = 50 orders

Applied overhead = $625 × 50

Applied overhead = $31,250

Actual cost = $53,000

Underapplied overhead = $53,000 - $31,250 = $21,750

4. Meals and Lodging

Anticipated cost = $4,000

Total anticipated nights = 10 + 10 = 20 nights

Overhead rate = $4,000 / 20 = $200 per night

Actual nights = 15 + 8 = 23 nights

Applied overhead = $200 × 23

Applied overhead = $4,600

Actual cost = $4,500

Overapplied overhead = $4,600 - $4,500 = $100

Step 2: Calculate total actual and applied overhead.

Total actual overhead:

$5,000 + $3,300 + $53,000 + $4,500 = $65,800

Total applied overhead:

$4,500 + $3,500 + $31,250 + $4,600 = $43,850

Step 3: Calculate the difference.

Underapplied overhead = Actual overhead - Applied overhead

Underapplied overhead = $65,800 - $43,850

Underapplied overhead = $21,950

Final Answer: $21,950 UNDERAPPLIED overhead.

This means Towering Inc. incurred $21,950 more in actual overhead costs than it assigned to its timber operations using its predetermined ABC rates.

Remember:

1. Underapplied overhead occurs when actual overhead exceeds applied overhead.
2. Overapplied overhead occurs when applied overhead exceeds actual overhead.

We also followed the problem's rounding instructions by keeping the overhead rates unrounded during calculations and rounding only the final amount for each cost pool.