Question
Chem Labs Inc. has entered into a contract with the provincial government to conduct some tests. The company analyzes the chemical and bacterial composition of
Chem Labs Inc. has entered into a contract with the provincial government to conduct some tests. The company analyzes the chemical and bacterial composition of well water in various municipalities. The contract price is $25.20 per test performed. The normal volume is 10,000 tests per month.
Each test requires two testing kits, which are $3.80 each at standard price. Direct labour to perform the test at standard is 10 minutes at $28.80 per hour.
At normal volume, the overhead costs for the month are as follows:
Variable overhead costs:
Indirect labour $ 18,000
Utilities 4,000
Labour-related costs 15,000
Laboratory maintenance 11,000
Total Variable O/H $ 48,000
Fixed overhead costs:
Supervisor $ 30,000
Amortization 28,000
Base utilities 9,000
Insurance 2,000
Total Fixed O/H $ 69,000
Total Overhead Expenses $ 117,000
The company applies all fixed and variable overhead based on direct labour-hours used.
During May, 9,000 tests were performed. The records show the following actual costs and production data:
Activity Actual cost
Number of test kits purchased 19,000 $ 70,300
Number of test kits used 18,500
Direct labour 1,623 hours $ 37,646
Total actual overhead costs:
Variable $ 45,200
Fixed $ 68,500
Test kits are kept in inventory at standard cost. At the end of May, no tests were in process.
Required
Calculate the total estimated Overhead cost and determine if there is over- or underapplied overhead.
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