Question

EXERCISE 3-15 Departmental Overhead Rates (L03-1, L03-2, LO3-3] White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a 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: Direct labor-hours ..... Machine-hours .......... .......... . Total fixed manufacturing overhead cost ........... Variable manufacturing overhead per machine-hour ....... Variable manufacturing overhead per direct labor-hour ..... Department Cutting Finishing 6,000 30,000 48,000 5,000 $264,000 $366,000 $2.00 $4.00 Required: 1. Compute the predetermined overhead rate to be used in each department. 2. Assume that the overhead rates that you computed in (1) above are in effect. The job cost sheet for Job 203, which was started and completed during the year, showed the following: Department Cutting Finishing 20 Direct labor-hours .......... Machine-hours ...... Materials requisitioned ....... Direct labor cost ...... 6 80 $500 $70 $310 $150 ............. 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 overhead rate based on direct labor-hours, rather than using departmental rates? Explain. No computations are necessary.

Answer 1

1.Calculation of predetermined overhead rate in each department

Cutting Department:

The estimated total manufacturing overhead cost in the Cutting Department is computed as follows:

Estimated fixed manufacturing overhead = $264,000

Estimated fixed manufacturing overhead = $2.00 per MH * 48,000 MH = $96,000

Estimated total manufacturing overhead cost = $264,000 + $96,000 = $360,000

The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead /Estimated total machine-hours
= $360,000/48,000 MHs
= $7.50 per MH

Finishing Department:

The estimated total manufacturing overhead cost in the Finishing Department is computed as follows:

Estimated fixed manufacturing overhead = $366,000

Estimated fixed manufacturing overhead = $4.00 per DLH * 30,000 DLH = $120,000

Estimated total manufacturing overhead cost = $366,000 + $120,000 = $486,000

The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead /Estimated total direct labour-hours
= $486,000/30,000 MHs
= $16.20 per DLH

2.Total manufacturing cost assigned to Job No.203

Direct materials ($500 + $310) $810

Direct Labor($70 + $150) $220
Cutting Department (80 MHs * $7.50 per MH) $600

Finishing Department (20DLHs * $16.20 per DLH) $324 $924

Total Manufacturing Cost    $1,954

3.Yes, if some jobs require a large amount of machine time and a small amount of labour time, they would be charged less overhead cost if a plantwide rate based on direct labour hours were used. It appears, for example, that this would be true of Job 203 which required considerable machine time to complete, but required a relatively small amount of labour hours.