Question

Describe a situation that may cause manufacturing overhead to be over-allocated in a given year. Also, describe a situation that may cause manufacturing overhead to be under-allocated in a given year.

Answer 1

Describe a situation that may cause manufacturing overhead to be over-allocated in a given year.

ABC Company allocates overhead on the basis of machine

hours. The budgeted overhead for the last period was

$100000 and the estimated machine hours was 20000 at the

beginning of the period.

The actual machine hours used turned out to be 21000 and

the actual manufacturing overhead was $90000.

The calculations would be as under:

Pre-determined overhead rate = 100000/20000 = $5 per MH.

Actual overhead allocated = 21000*$5 = $105000

As overhead allocated is more than the actual overhead of

$90000, overhead is over-allocated to the extent of

$15000 ($105000-$90000).

Also, describe a situation that may cause manufacturing overhead to be under-allocated in a given year.

For the above budget situation, if, the actuals are say;

Machine hours used were 20000 and

the actual manufacturing overhead was $110000.

The calculations would be as under:

Pre-determined overhead rate = 100000/20000 = $5 per MH.

Actual overhead allocated = 20000*$5 = $100000

As overhead allocated is less than the actual overhead of

$110000, overhead is under-allocated to the extent of

$10000 ($110000-$100000).