Question

ILLINOIS CORPORATION

…….. produces two products and uses a predetermined overhead rate to apply overhead. The company currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided:

			Department 1		Department 2
Direct labor hours			640,000		128,000
Machine hours			16,000		192,000
Overhead cost			$384,000		$1,152,000

The following actual results by department and product were reported at year end:

			Department 1		Department 2
Direct labor hours			627,200		134,400
Machine hours			17,600		204,800
Overhead cost			$400,000		$1,232,000
			Product A		Product B
Direct labor hours:
Department 1			480,000		147,200
Department 2			96,000		38,400
Machine hours:
Department 1			8,000		9,600
Department 2			24,800		180,000

Required:

1. Compute the plantwide predetermined overhead rate and calculate the overhead assigned to each product.

1. Plant wise predetermined overhead rate

Formula for overhead rate = Budgeted overhead/budgeted Volume

Budgeted overhead for the plant = 384,000 + 1,152,000 = $1,536,000

Budgeted volume (labor hour) = 640,000 + 128,000 = 768,000 Hours

Predetermined overhead rate = 1,536,000/768,000 = $2 per labor hour

Calculation of Overhead assigned to product 1

Total labor hour for product 1 = 480,000 + 96,000 = 576,000 Hours

Overhead for the product = 576,000 * $2 (labor hour of product 1 multiplied by predetermined overhead rate)

Overhead assigned to product 1 = $1,152,000

Overhead assigned to product 2 = (147200 + 38,400) * $2 (labor hour of product 2 multiplied

By overhead rate) = $371,200

2. Calculate the predetermined departmental overhead rates and calculate the overhead assigned to each product.

Department wise overhead rates calculation:

Department 1 = $384,000/640,000 (estimated overhead divided by labor hour) = $0.6 Per hour

Department 2 = 1,152,000/192,000 (estimated overhead divide by machine hour) = $ 6 Per hour

Product overhead calculation based on department rate:

Product 1 = 480,000 Labor hour + 24,800 machine hour

Over head for product 1 = (480,000 *$ 0.6) + (24,800 * $6)

= 288,000 + 148,800 = $436,800

Over head for product 2 = (147,200 * $0.6) + (180,000 * $6)

Overhead assigned to product 2    = 88,320 + 1,080,000 = $ 1,168,320

3. What was the impact of the company using the blanket rate versus departmental rates? Were certain products overcosted or undercosted? Explain.
4. Compute the applied overhead for the year and the amount of mis-applied overhead for the firm using: a. A blended rate b. A departmental rate

i need help with question 3 and 4 please!

Answer 1

Answer is given below for Q.No.3 and 4

3 Total Overheads allocated Blanket rate Departmental rate Difference Comments Product A Product B $1,152,000 $371,200 $436,800 $1,168,320 $715,200 $797,120 Over-Costed Under-Costed Product A was over-costed in Blanket rate method Product B was under-costed in Blanket rate method Blanket rate uses only one cost driver for both the department but departmental rates use different rates in different department. Hence cost allocation varies based on the cost drivers 4 Blanket rate Labor hours Direct Labor hour rate Overhead applied Actual Overhead Difference Comments Department 1 Department 2 627,200 134,400 $2.00 $2.00 $1,254,400 $268,800 $400,000 $1,232,000 $854,400 -$963,200 Over-applied Under-applied Departmental rate Direct Labor hours Machine hours Direct Labor hour rate Machine hour rate Overhead applied Actual Overhead Difference Comments Department 1 Department 2 627,200 204,800 $0.60 $6.00 $376,320 $1,228,800 $400,000 $1,232,000 -$23,680 $3,200 Under-applied Under-applied