Factory Overhead Rates and Account Balances

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	$928,800		$811,800
Estimated direct labor hours for year				12,300
Estimated machine hours for year		23,220
Actual factory overhead costs for August		$74,210		$70,330
Actual direct labor hours for August				1,110
Actual machine hours for August		1,810

a. Determine the factory overhead rate for Factory 1. Round your answer to the nearest cent. $fill in the blank 1 per machine hour

b. Determine the factory overhead rate for Factory 2. Round your answer to the nearest cent. $fill in the blank 2 per direct labor hour

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

Factory 1

$fill in the blank 3

Factory 2

$fill in the blank 4

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

Factory 1	$fill in the blank 5	overappliedunderapplied
Factory 2	$fill in the blank 7	overappliedunderapplied

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

labor-intensivemachine-intensive

manufacturing operation, and Factory 2 has a

labor-intensivemachine-intensive

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