Question

White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor-hours. At the beginning of the year, the company made the following estimates:

	Department
	Cutting		Finishing
Direct labor-hours		7,600		73,000
Machine-hours		66,500		2,800
Total fixed manufacturing overhead cost	$	400,000	$	575,000
Variable manufacturing overhead per machine-hour	$	4.00		—
Variable manufacturing overhead per direct labor-hour		—	$	2.75

Required:

1. Compute the predetermined overhead rate for each department.

2. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

	Department
	Cutting				Finishing
Direct labor-hours			4				20
Machine-hours			87				5
Direct materials		$	760			$	380
Direct labor cost		$	76			$	380

Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.

3. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?

Answer 1

White company
Part 1
Predetermined OH rate for cutting dept. = ( 400000 / 66500 ) + 4
$ 10.015 per machine hour
Predetermined OH rate for finishing dept. = ( 575000 / 73000 ) + 2.75
$ 10.627 per direct labour hour
Part 2
Cost of Job 203
Direct material :
Cutting	760
Finishing	380	1140
Direct labour :
Cutting	76
Finishing	380	456
Overhead :
Cutting ( 87 * 10.015 )	871
Finishing ( 20 * 10.627 )	213	1084
Total Cost of Job		2680
Part 3
Substantially different amounts can be expected.
Since machine hours are relatively higher for cutting department as compared
to the direct labour hours taken by the cutting department due to which most of the
manufacturing costs will be transferred to finishing dept. which will be not correct.