Question

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 6, 800 65.000 3, 100 380,000 $ 576,000 $ 2.00 - $ 2.75 Direct labor-hours Machine-hours Total fixed manufacturing overhead cost Variable manufacturing overhead per machine-hour Variable manufacturing overhead per direct labor-hour 54,500 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 3 Finishing 15 Direct labor-hours Machine-hours Direct materials Direct labor cost $ 760 $ 66 $ 390 $330 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

Departmental overhead rates allocates cost to the job on the basis of cost drivers that affects the cost.

Plant wide overhead rate uses single cost allocation base to allocate costs.

(1)

	cutting department	Finishing department
Estimated fixed overhead cost	$360,000	$576,000
cost driver	54,500 Machine hours	65,000 labor hours
Fixed overhead rate	$6.61 [360,000/54,500]	$8.86[576,000/65,000]
Variable overhead rate	$2	$2.75
Pre determined overhead rate	$8.61 per machine hour[$6.61+$2]	$11.61 per labor hour [$8.86+$2.75]

2)

	Cutting	Finishing
Pre determined rate	$8.61 per machine hour	$11.61 per labor hour
cost driver used by job 203	81	15
cost allocated	$697.41[$8.61*81]	$174.15[$11.61*15]
Add: Direct material	$760	$390
Add: Direct Labor cost	$66	$330
Total manufacturing cost	$1523.41[697.41+760+66]	$894.15[174.15+390+330]

Total = $1523.41+$894.15

TOTAL MANUFACTURING COST=$2417.56

3) if plant wide overhead rate is used based on direct labor hours

overhead cost	$1,223,750[360,000+576,000+(2*54,500)+(2.75*65000)]
Cost driver	71,800[6800+65000]
plant wide overhead rate	$17.04[$1,223,750/71,800]

cost allocated to job 203

= $17.04 * (3+15)

=$306.72

Cost allocated as per departmental rate is $871.56[697.41+$174.15]

So, YES there is substantial difference in amount allocated as per plant wide and as per departmental rates.