Question 9.3: A tool manufacturer uses machine hours (MH) to allocate over...
A tool manufacturer uses machine hours (MH) to allocate overhead costs. The company expects to use 1,000 machine hours during the month and overhead costs are expected to be $100,000. Therefore, the application rate of $100,000/1,000 MH, or $100/MH is used.
a. If the actual overhead costs during the month are $90,000 and actual machine hours are 900, what is the difference between applied and actual overhead?
b. If the actual overhead costs during the month are $98,000 and actual machine hours are 950, what is the difference between applied and actual overhead?
a.
| Actual overhead costs | $90,000 |
| Applied overhead costs ($100/MH × 900 MH) | 90,000 |
| Difference | $0 |
There is no difference between applied and actual costs because the actual application rate ($90,000/900 MH = $100/MH) is equal to the budgeted application rate.
b.
| Actual overhead costs | $98,000 |
| Applied overhead costs ($100/MH × 950 MH) | 95,000 |
| Difference (under-absorbed) | $3,000 |
The actual application rate ($98,000/950 MH = $103.16/MH) is higher than the budgeted application rate ($100/MH). As a result, the overhead is under-absorbed.