Question

22. As part of its year-end analysis, Brown Industries accounting team is trying to see where things went wrong. At the beginning of the period, Brown estimated that manufacturing overhead would be $390,000, which was to be applied to jobs using a predetermined rate of $20 per direct labor hour. The management team was shocked...just shocked...to find that although the company used 20% FEWER direct labor hours than it expected, actual overhead incurred exceeded estimated overhead by 36%! How much more did Brown spend on overhead per direct labor hour than what the company initially expected? (Phrased another way, how much should Brown increase its predetermined overhead rate next year so that such a large amount of under-applied overhead will not be left at the end of the period?)

Answer 1

Pre determined overhead is the cost per cost diver.

Here cost driver is direct labor hours.

We will first find cost per direct labor hours estimated

=cost /direct labor hour

= $390,000/$20

19,500 hours of direct Labor hours

ACTUAL LABOR HOUR

=19500-(20%*19,500)

=15,600 hours were actually incurred

ACTUAL COST

=390,000+(390,000*36%)

=$530,400

Actual spending per direct labor hour

=actual cost/actual direct labor hour

=$530,400/15600

=$34 per direct labor hour

Thus it spent ($34-$20) $14 more overhead on direct labor hour than what company expected initially.

Lets also calculate in percentage

($14/$20)*100 = 70%

Thus it spent 70% more per direct labor hour than what it initially planned.