Question

Overhead Applied to Jobs, Departmental Overhead Rates

Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xania’s plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

	Department A		Department B
Overhead costs (expected)	$95,000		$48,000
Normal activity (machine hours)	12,000		3,800

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. Round your answer to two decimal places.
$ per machine hour

2. Compute predetermined overhead rates for each department using machine hours. (Note: Round to two decimal places, if necessary.)

Department A	$ per machine hour
Department B	$ per machine hour

3. Conceptual Connection: Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Round final answers to the nearest cent, if necessary.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

Which of the two approaches gives the fairer assignment?

4. Conceptual Connection: Repeat Requirement 3, assuming the expected overhead cost for Department B is $73,000 (not $48,000). Round overhead rates to the nearest cent.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

For this company, would you recommend departmental rates over a plantwide rate?

Answer 1

Each part of the question with explanation is solved below:

1.

Dept A & D Dept B $48,000 Total $1,43,000 $95,000 Querche ad cont (empected) Noremal activity (machine howrs) 12,000 3,800 15800 1 = Predetermined overhead rate for the plant as a whole Total Overhead cost Total machine hows = 143000 15800 = $9.05 per machine hour 2 Predetermined overhead rate for each department using machine hours: Department A = Overhead cast of Septt. A Machine hours of Deptt. A 95000 $7.92 promachine 12000 hour wameur Department B = Overhead cost of Septi.B Machine hour of depti. B 48000 = $12.63 3800 per machine hour

2.

mill Hd Job 73 dith $633.50 $ 789.90 Job 74 $633.50 Plantwide Departmental i RN 9 648.60 Cronicaente Overhead cost of jobs using plantwide rate : To673 Total machine hows used 20+50= 70 hours Plantwide overhead rate = $9.05 per machine hour D. No pisi te stoot Querhead Cost = $9.05070 = $633.50 Joby Total machine howes med = 50+ 20 = 70 hours ... & Plant wide overhead rate $9.05 per machine hour los Overhead wat = $9.05X70 as eller = $633.50 enes run ento de overhead cost of joles using departmental sates: Tob 73 00821 Machine howes weed = 20 machine howes from septl-A Deptt. A Querchead sate = $7.92 Sepet B Dept. B Querhead rate = $12.63 Querhead cost of a $158.40 Querheed costo dept. 8 - $631,50 used from =50 Deptt. Total overhead coat of Job 73= 158.40+ 631.50= $789.90

3.

machine howes used = 20 اور ' Job 74 machine hours used = 50 from Deptt-A from Deptt. B She Deptt -A owerhead zate - $7.92 Depti.8 ouerhead rate = $12.63 Quechead cast of = $396 overhead cast of = $252,60 Deptt. A Deptt-8 Total overhead cost = $396 + $252.60 woot = $648.60 W ien - The second approach ie using departmental overhead rate gives the fairer view because the departmental aarhead rate of the departments vous ato are very different. Job to uses more hours. of deptt. B which has high overhead rate, thus it should be changed more ouerhead cost, na الان الاول 4. With the exactly same steps we will do this requirement Overhead chats assigned to jobs using dog plant wilde sate Plant wide ouerhead sate = 95,000+ 73000 15800 wered when $10.63 o bos Job 73 70674 stor trevus Atgal - stox below do trust Overhead cost = 700 10.63 Overhead coste! Yox 10.63 02.183d baba bun = $744.10 - $744.1 3 0 loto

4.

1 Querhead cast assigned to jobs using departmental rates Zob 73 Querhead rate of bepte. B = 73000 3800 Quelhead cost of - 4158.40 depte A = $19.21 overhead cost=50x19.2) 2$960. 50 Total Querhead cost = stor $1118.9 Job ty Queshead cost of = 8396 Deptt. A Overhead cost = 20 X 19.21 of septi- B - = 384.20 9780.20 Total overhead costs we will recommend departmental rate because there is bu a lot a difference bew the per machine hour rate of this company. Usning plant wide will give equal owerhead cost. However there coat ta are different y seen by departmental activity. Job 73 Tobty Plantwide $744.10 $744.10 Departmental $ 1118.9 $780.20