- Calculation of Predetermined Overhead rate
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Aloe Ltd.
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|
|
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Predetermined overhead rate
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=
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Budgeted factory overheads/Budgeted units of production
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|
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=
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499,200/104,000
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|
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=
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$ 4.80
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|
Basil Ltd.
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|
|
|
Predetermined overhead rate
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=
|
Budgeted factory overheads/Budgeted direct labor hours
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|
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=
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888,160/164,000
|
|
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=
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$ 5.42
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(b) Allocation of factory overhead
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Aloe Ltd.
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|
|
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Actual Units of production
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=
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109,600
|
|
Predetermined overhead rate
|
=
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$ 4.80
|
|
Overheads applied
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=
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$ 526,080
|
|
Actual overheads incurred
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=
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$ 528,000
|
|
Under application of overheads
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=
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528,000-526,080
|
|
|
=
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$ 1,920
|
|
Basil Ltd.
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|
|
|
Actual direct labor hours
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=
|
174,000
|
|
Predetermined overhead rate
|
=
|
$ 5.42
|
|
Overheads applied
|
=
|
$ 942,316
|
|
Actual overheads incurred
|
=
|
$ 860,000
|
|
Over application of overheads
|
=
|
942,316-860,000
|
|
|
=
|
$ (82,316)
|
Allocation of overheads is an important factor in cost accounting. This allocation of overhead is done with the help of predetermined overhead allocation rate. This predetermined overhead allocation rate is calculated by dividing the budgeted overheads with budgeted activities, which differs from companies to companies. After this, allocation of overheads is done according to this predetermined overhead allocation rate and the allocated overheads are compared with the actual overheads incurred. If the actual overheads incurred are in excess of applied overheads then this situation is known as under application of overheads and similarly, if the applied overheads are in excess of actual overheads then this situation is known as over application of overheads.
In the given case, the company Aloe Ltd. allocates the overheads on the basis of units of production. The resultant predetermined overhead rate for this company is $4.80 and the allocated overheads are $526,080 whereas the actual overheads are $528,000. Since, the actual overheads are in excess of applied overheads, so the company has an under application of overheads by $1,920.
Similarly, in the company Basil Ltd., the company allocates the overheads on the basis of direct labor hours. The resultant predetermined overhead rate of the company is $5.42 and the allocated overheads comes to $942,316 whereas the actual overheads are $860,000. Since, the applied overheads are in excess of actual overheads, the company faces a situation of over application of overheads by $82,316.
Given Information
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Revenue for the first six months 2020
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|
|
|
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|
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|
|
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(Amount in $)
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|
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Particulars
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Jan
|
Feb
|
Mar
|
Apr
|
May
|
June
|
Total
|
|
|
Revenue
|
10,000
|
50,000
|
80,000
|
25,000
|
80,000
|
60,000
|
305,000
|
|
|
Schedule of estimated cash collections from revenue for the first six months of 2020
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|
|
|
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|
|
|
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(Amount in $)
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|
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Particulars
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Jan
|
Feb
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Mar
|
Apr
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May
|
June
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Total
|
|
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Cash collection
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|
|
|
|
|
|
|
|
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- 70% in the month following billing
|
-
|
7,000
|
35,000
|
56,000
|
17,500
|
56,000
|
171,500
|
|
|
- 30% in the 2nd month following billing'
|
-
|
-
|
3,000
|
15,000
|
24,000
|
7,500
|
49,500
|
|
|
Total cash collection
|
-
|
7,000
|
38,000
|
71,000
|
41,500
|
63,500
|
221,000
|
|
|
Calculation of costs under both the alternatives
|
|
|
|
|
|
|
(Amount in $)
|
|
Particulars
|
Adventure 1
|
Adventure 2
|
Differential
|
|
Nature of service
|
Rock climbing adventure
|
White water rafting adventure
|
|
|
David's time
|
1,100
|
1,100
|
-
|
|
Specially fitted-out SUV
|
2,800
|
2,800
|
-
|
|
Cost of food & equipment
|
1,800
|
1,360
|
440
|
|
Fixed setup costs
|
2,500
|
2,500
|
-
|
|
Total costs
|
8,200
|
7,760
|
440
|
|
Calculation of revenue under both the alternatives
|
|
|
|
|
|
(Amount in $)
|
|
Particulars
|
Adventure 1
|
Adventure 2
|
Differential
|
|
Nature of service
|
Rock climbing adventure
|
White water rafting adventure
|
|
|
Revenue
|
8,600
|
7,200
|
1,400
|
|
Total revenue
|
8,600
|
7,200
|
1,400
|
|
Analysis of Profit under both the alternatives
|
|
|
|
|
|
|
(Amount in $)
|
|
Particulars
|
Adventure 1
|
Adventure 2
|
Differential
|
|
Nature of service
|
Rock climbing adventure
|
White water rafting adventure
|
|
|
Revenue
|
8,600
|
7,200
|
1,400
|
|
Costs
|
8,200
|
7,760
|
440
|
|
Profit
|
400
|
(560)
|
960
|
Conclusion
Using the differential income and expenses, the David should provide the adventure with rock climbing of 10 persons as it leads to an incremental revenue of $960.
