Question

Ryan Corporation manufactures auto steering systems. Prime cost and machine time estimates for one unit of the product for the year follow: Direct materials $ 200 Direct labor ($12/hour) $ 300 Machine hours 20 This product requires 15 hours of direct labor in Department A and 10 hours in Department B. Also, it requires 5 machine hours in Department A and 15 machine hours in Department B. Using output as the activity, the factory overhead costs estimated in these two departments follow: A B Variable cost $ 150,000 $ 80,000 Fixed cost 94,000 163,000 Management expects the firm to produce 1,000 units during the year. Required: 1. Assume the total actual overhead base used was equal to the estimated base for the 1,000 units produced. Assume that factory overhead was applied on the basis of direct labor hours. Compute the predetermined plantwide factory overhead rate. 2. If factory overhead were applied on the basis of machine hours, what would be the plantwide overhead rate? 3. If the company produced 1,000 units during the year, what was the total amount of applied factory overhead in each department in requirements 1 and 2? 5. Compute the departmental overhead rate and amount of applied overhead for Department A using direct labor hours as the allocation base and for Department B using machine hours as the allocation base. rev: 01_2

Answer 1

1) Number of units expected to produce Direct labor hour required per unit Total direct labor hours estimated Total estimated overhead cost Plant-wide overhead rate per direct labor hour 1,000 25 [15 + 10] 25,000 (1000 units x 25 labor hours] $487,000 [($150000 + $94000) + ($80000 + $163000)] $19.48 [$487000 / 25000 labor hours] 2) Number of units expected to produce Machine hour required per unit Total machine hours estimated Total estimated overhead cost Plant-wide overhead rate per machine hour 1,000 20 [5 + 15] 20,000 (1000 units x 20 machine hours] $487,000 [($150000 + $94000) + ($80000 + $163000)] $24.35 ($487000 / 20000 machine hours) 3) Using Plant-wide overhead rate based on direct labor hours: Number of units expected to produce Direct labor hour required per unit Estimated departmental direct labor hours Plant-wide overhead rate per direct labor hour Overhead cost allocated to each department 1,000 15 15,000 $19.48 $292,200 B 1,000 --> (a) 10 --> (b) 10,000 --> (c) = (a) x (b) $19.48 --> (d) [As calculated in Part-1] $194,800 --> (c) x (d)

Using Plant-wide overhead rate based on machine hours: Number of units expected to produce Machine hour required per unit Estimated departmental direct labor hours Using Plant-wide overhead rate based on direct Overhead cost allocated to each department 1,000 5 5,000 $24.35 $121,750 1,000 --> (a) 15 -->(b) 15,000 --> (c) = (a) (b) $24.35 --> (d) [As calculated in Part-1] $365,250 --> (c) x (d) Variable cost Fixed cost Total fixed manufacturing overhead cost Total direct labor hours estimated Total machine hours estimated Departmental total overhead rate $150,000 $94,000 $244,000 15,000 - $16.27 Per DLH $80,000 --> (p) $163,000 --> (9) $243,000 --> (p) + (9) - (1000 units x 15 direct labor hours] 15,000 (1000 units x 15 machine hours] $16.20 [A = $244000 / 15000 DLHs = $16.27; B = $243000 / 15000 MHS = $16.2] Per MH