Question

Departmental Overhead Rates

Lansing, Inc., provided the following data for its two producing departments:

		Molding		Polishing		Total
Estimated overhead		$375,000		$100,000		$475,000
Direct labor hours (expected and actual):
Form A		1,000		5,000		6,000
Form B		4,000		15,000		19,000
Total		5,000		20,000		25,000
Machine hours:
Form A		3,500		3,000		6,500
Form B		1,500		2,000		3,500
Total		5,000		5,000		10,000

Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 20,000 units of Form A produced and sold and 50,000 of Form B.

Required:

1. Calculate the overhead rates for each department.

Molding	$ per machine hour
Polishing	$ per direct labor hour

2. Using departmental rates, assign overhead to the two products and calculate the overhead cost per unit. Round your answers to the nearest cent.

	Unit Overhead Cost
Assigned unit overhead cost for Form A	$ per unit
Assigned unit overhead cost for Form B	$ per unit

How does this compare with the plantwide rate unit cost, using direct labor hours?
Relative to the plantwide rate, the cost   for Form A and   for Form B.

3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates. Round your answers to the nearest cent.

	Unit Overhead Cost
Form A	$ per unit
Form B	$ per unit

Compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?

Relative to the plantwide rate, the cost   for Form A and   for Form B.

Answer 1

1. Overhead rate for Molding department:

Estimated over head= 375000

Machine hours are used to assign the overhead of the Molding Department.

Hence, Total Machine hours= 5000 Hours

Overhead Rate = Estimated total overhead/ Total machine hours

                            = $375000/ 5000 hours

                            = $75/ machine hour

Overhead rate for Polishing department:

Estimated over head= 100000

Direct labor hours are used to assign the overhead of the Polishing Department.

Hence, Total direct Labor hours= 20000 Hours

Overhead Rate = Estimated total overhead/ Total direct labor hours

                            = $100000/20000 hours

                            = $5 / direct Labor hour

Overhead rate for each department
Molding	$75 per machine hour
Polishing	$5 per direct labor hour

(2)

Particulars	Form A	Form B	Total
Molding Department	262500	112500	375000
	(75*3500)	(75*1500)
Polishing Department	25000	75000	100000
	(5*5000)	(5*15000)
Total Overhead cost	287500	187500
Total units	20000	50000
Overhead cost per unit	14.375	3.75

	Unit Overhead Cost
Assigned unit overhead cost for Form A	$14.375 per unit
Assigned unit overhead cost for Form B	$ 3.75 per unit

Plantwide rate unit cost, using direct labor hours:-

Total Plantwide cost= $475000

Total labor Hours = 25000 hours

Plantwide rate unit cost= Total plantwide cost/ Total labor hours

                                     = $475000/25000 hours

                                     = 19/direct labor hour

While Overhead cost per molding and polishing department is $75/machine hr and $5/ direct labor hour, The plantwide overhead rate is $ 19/ direct labor hour.

Using plantwide rate, the cost for Form A and for Form B:-
Particulars	Form A	Form B	Total
Plantwide rate	$19/ direct labor hours
Direct labor hours
Molding	1000	4000	5000
Polishing	5000	15000	20000
Total direct labor hours	6000	19000	25000
Cost:	114000	361000	475000
	(6000hr*19)	(19000*19)
Hence Cost for form A	$   1,14,000.00
Cost for form B	$   3,61,000.00

	Cost	Units	Cost/unit
Form A	$   1,14,000.00	20000	5.7
Form B	$   3,61,000.00	50000	7.22

Comparison	Form A	Form B
Department Rate	14.375	3.75
Palntwide rate	5.7	7.22

The Unit rate of Form A decreases in plantwide rate while cost of Form B increased. This might not be correct presentaion of product cost because molding department overhead might be correctly allocated with machine hours

(3)

Particulars	Form A	Form B	Total
Molding Department	90000	285000	375000
	(75*1200)	(75*3800)
Polishing Department	25000	75000	100000
	(5*5000)	(5*15000)
Total Overhead cost	115000	360000
Total units	20000	50000
Overhead cost per unit	5.75	7.2

The plantwide rate form form A and form B are same as above since there is no change in labor hours.

Hence Cost for form A	$   1,14,000.00
Cost for form B	$   3,61,000.00

	Cost	Units	Cost/unit
Form A	$   1,14,000.00	20000	5.7
Form B	$   3,61,000.00	50000	7.22

Comparison	Form A	Form B
Department Rate	5.75	7.2
Palntwide rate	5.7	7.22

In the second case, the unit rate is not much different using both rates since both machine hours and labor hours are higher for molding department