Question

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:

	Department
	Cutting		Finishing
Direct labor-hours		8,500		74,000
Machine-hours		59,900		1,400
Total fixed manufacturing overhead cost	$	370,000	$	401,000
Variable manufacturing overhead per machine-hour	$	3.00		—
Variable manufacturing overhead per direct labor-hour		—	$	3.75

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				Finishing
Direct labor-hours			4				18
Machine-hours			81				4
Direct materials		$	730			$	360
Direct labor cost		$	84			$	378

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

Req.1 Predetermined Overhead Rate:

Cutting Department:

Total Estimated Manufacturing Overhead ÷ Total Allocation of Base

= [ $ 370,000 + ( 59,900 ×$3) ] ÷ 59,900 Machine Hour

= $ 549,700 ÷ 59,900

= $ 9 .18 Per MH

Finishing Department:

Total Estimated Manufacturing Overhead ÷Total Allocation of Base

= [ $ 401,000 + ( $ 3.75 ×74,000) ] ÷ 74,000 DLH

= $ 678,500 ÷ 74,000

= $ 9.17 Per DL

Req.2 Total Cost Assigned to Job 203

	Cutting	Finishing	Total
Direct Material	$730	$360	$ 1090
Direct Labor	84	378	$462
Overhead Applied( $9.18×81);( $9.17 ×18)	743.58	165.06	$908.64
Total Cost Assigned	$1557.58	$903.06	$2460.64

Req.3

Yes;

if some jobs require a large amount of machine time and a small amount of labor time, they would be charged substantially less overhead cost if a plantwide rate based on direct labor 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 labor hours.