Overhead Analysis

[Aakanksha]

A company which absorbs production overheads on the basis of units produced the following budgeted and actual information applied in its last accounting period.

BUDGETED ACTUAL

PRODUCTION OVERHEAD($000) 180,000 178,080

MACHINE HOURS 50,000 48,260

UNITS PRODUCED 40,000 38,760

AT THE END OF THE PERIOD, PRODUCTION OVERHEAD WIIL REPORTED AS UNDER-RECOVERED OR OVER- RECOVERED BY HOW MUCH?

[ahwriter]

Hi michman, you can easily calculate I will give you hint, Here only thing that has to be know is definition of under recovery and over recovery. under recovery can be defined as If customers pays less for the product on a particular day where as When they are paying too much for the product on that day, it is known as over recovery.

[juwanine]

To determine whether production overhead is under-recovered or over-recovered, we can calculate the predetermined overhead rate (POHR) and compare it to the actual overhead costs incurred.

The predetermined overhead rate is calculated as follows:

POHR = Budgeted Production Overhead / Budgeted Machine Hours

POHR = $180,000 / 50,000 machine hours = $3.60 per machine hour

Now, we can calculate the overhead cost that should have been applied based on the actual machine hours worked:

Overhead Applied = POHR x Actual Machine Hours
Overhead Applied = $3.60 per machine hour x 48,260 machine hours = $174,096

Now, let’s calculate the under-recovery or over-recovery:

Actual Production Overhead – Overhead Applied
= $178,080 – $174,096
= $3,984

Since the actual production overhead of $178,080 is greater than the overhead applied of $174,096, the production overhead is over-recovered by $3,984.

[Author]

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