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. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:

		Factory 1		Factory 2
Estimated factory overhead cost for fiscal
	year beginning August 1	$1,135,740		$520,800
Estimated direct labor hours for year				8,400
Estimated machine hours for year		24,690
Actual factory overhead costs for August		$91,000		$45,240
Actual direct labor hours for August				760
Actual machine hours for August		1,930

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 January.

Factory 1	$
Factory 2	$

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

Factory 1	$
Factory 2	$

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