4. If the actual overhead cost and the actual professional staff hours
charged to clients’ accounts turn out to be exactly as estimated there
would be underapplied overhead as shown below.
2005 2004
Predetermined overhead rate (see above) (a)... $51.75 $51.75
Actual professional staff hours charged to
clients’ accounts (by assumption) (b) ... × 4,600 × 4,500
Overhead applied (a) × (b) ... $238,050 $232,875
Actual overhead cost incurred (by assumption)... 310,500 310,500
Underapplied overhead ... $ 72,450 $ 77,625
The underapplied overhead is best interpreted in this situation as the
cost of idle capacity. Proponents of this method of computing predeter-
mined overhead rates suggest that the underapplied overhead be
treated as a period expense that would be separately disclosed on the
income statement as Cost of Unused Capacity.
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
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