Question

POHR (Predetermined Overhead Rate) is based on two estimates:

• Total expected MO.
• Total expected cost driver.

1.How likely is it that POHR is applied correctly?

2.What happens when POHR is underapplied (too little added as MO to the job sheets) or overapplied (too much applied to the job sheets)?

3.Which is worse (under or over)?

Answer 1

Solution 1:

Predetermined overhead rate is determined by dividing expected overhead cost by expected cost driver. The computed POHR is used to apply overhead to production on the basis of actual usage of cost driver. It is very rare that applied overhead is equal to actual overhead incurred because overhead is applied on the basis of budget.

Solution 2:

When POHR is underapplied or overapplied then amount of underapplied and overapplied overhead is transferred to cost of goods sold. Underapplied overhead means actual cost is higher than applied cost. Overapplied overhead means actual cost is lesser than applied cost.

Solution 3:

Underapplied overhead situation is worse as it will result in under estimation of unit product cost and may result in selling price derived on lower side. It increases the cost of goods sold.