Question

Perreth Products manufactures its products in two separate departments: Machining and Assembly. Total manufacturing overhead costs for the year are budgeted at $1,050,000. Of this amount, the Machining Department incurs $630,000 (primarily for machine operation and depreciation) while the Assembly Department incurs $420,000. The company estimates that it will incur 8,400 machine hours (all in the Machining Department) and 15,000 direct labor hours (3,000 in the Machining Department and 12,000 in the Assembly Department) during the year. Perreth Products currently uses a plantwide overhead rate based on direct labor hours to allocate overhead. However, the company is considering refining its overhead allocation system by using departmental overhead rates. The Machining Department would allocate its overhead using machine hours (MH), but the Assembly Department would allocate its overhead using direct labor (DL) hours. The following chart shows the machine hours (MH) and direct labor (DL) hours incurred by Jobs 500 and 501 in each production department: (Click the icon to view the additional information.) Read the requirements.

Answer 1

1.Predetermined Plantwide rate = Total Overheads/Total labor hours
=1050000/15,000 = $70 per labor hour
2.Rate = Departmental Overheads/Driver Machining = 630,000/8400 = $75 per machine hour
Department B = 420,000/12,000 = $35 per labor hour
501 uses more
10 more machine hours, costs the company more resources
	Job 500	Job 501
Total direct labor hours	16	16
Plantwide	70	70
Overhead	1,120	1,120
	Job 500	Job 501
Machining	=75*10 = $750	1,500
Assembly	420	420
Total	1,170	1,920
Equal overheads
More to 501
extra machine hours used
Correct/fair
	Job 500	Job 501
Direct Material	1500	1500
Direct labor	480	480
Manufacturing overhead	1,120	1,120
Total manufacturing costs	3100	3100
Mark up	125%	125%
Sales Price	3,875	3,875
	Job 500	Job 501
Sales Price	3,875	3,875
Total manufacturing costs	3,100	3,100
Gross Profit	775	775
	Job 500		Job 501
Sales Price		3,875		3,875
Less: Costs
Direct Material	1500		1500
Direct labor	480		480
Manufacturing overhead	1170	3150	1920	3,900
Gross Profit		725		-25
Believes that it earns
Realises that loses money on 501