Question

The Blues Brothers Company uses normal costing. The company has one service department (machine maintenance), and two production departments (P1 and P2). The service department allocates costs to the production department based on machine hours. The company allocates service costs using what the book calls the dual rate method. In other words, the company DOES make a distinction between fixed and variable costs when charging service costs to the user departments. Both of the production departments use direct labor hours as their basis for computing predetermined overhead rates. Department P1 Department P2 Machine Maintenance Budgeted variable cost $120,000 Budgeted fixed cost $180,000 Budgeted machine hours Long run avg. mach. Hrs. Budgeted variable OH cost Budgeted fixed OH cost Budgeted direct labor hrs. 55,000 hours 65,000 hours $220,000 $260,500 125,000 hours 25,000 hours 35,000 hours $ 80,000 $120,500 100,000 hours $126,000 $189,000 Actual variable costs Actual fixed costs Actual machine hours Actual variable OH cost Actual fixed OH cost Actual direct labor hours 60,000 hours $240,000 $260,000 140,000 hours 30,000 hours $ 99,000 $120,000 110,000 hours The departmental overhead numbers in the above tables do NOT have the services costs added into them. You will need to do that as needed. 1. Compute the predetermined overhead rate for P1. Round your rate to the nearest cent, if needed. 2. At the end of the year, compute the total amount of underallocated or overallocated overhead in Department P1, and tell whether it is underallocated or overallocated.

Answer 1

1. Predetermined overhead rate for variable costs = Variable OH cost / Budgeted direct labor hours = 220,000 / 125,000 = $1.76 per hour

2. Allocation of overheads for actual hours incurred = 140,000 * 1.76 = 246,400

Allocation of fixed overheads =260500

Total overheads allocated = 506900

Total overheads incurred = 500,000

Overheads overallocated = 506900 - 500,000 = 6900

* Fixed costs are allocated as a whole irrespective of the capacity used.