Factory Overhead Rates and Account Balance

Prostheses Industries operates two factories. The manufacturing operations of Factory 1 are machine intensive, while the manufacturing operations of Factory 2 are labor intensive. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimatedfactory overhead costs, direct labor hours, and machine hours are as follows:

Factory 1 Factory 2

fiscalyear beginning August 1 $264,780 $890,400

Estimated direct labor hours for year 15,900

Estimated machine hours for year 14,710

Actual factory overhead costs for August $21,220 $76,880

Actual direct labor hours for August 1,430

Actual machine hours for August 1,150

a.Determine the factory overhead rate for Factory 1. Round your answer to the nearest cent.

$____________per machine hour

b.Determine the factory overhead rate for Factory 2. Round your answer to the nearest cent.

$____________per direct labor hour

c.Determine the factory overhead applied to production in each factory for August.

Factory 1 $___________

Factory 2 $____________

d.Determine the balances of the factory accounts for each factory as of August 31, and indicate whether the amounts represent overapplied orunderapplied factory overhead.

Factory 1 $_____________ a. over applied b.underapplied

Factory 2 $_____________ a. over applied b.underapplied

e.Explain why Factory 1 uses machine hours to allocate factory overhead while Factory 2 uses direct labor hours.

Factory overhead should be allocated using a base that is related to (causes) the overhead costs incurred.

Factory 1 has aa.labor intensive or b. machine intensive manufacturing operation, and

Factory 2 has aa.labor intensive or b. machine intensive manufacturing operation.

Thus, Factory 1 uses machine hours, and Factory 2 uses direct labor hours to allocate factory overhead.