Question

lantwide Overhead Rate, Activity-Based Costing, Job Costs

Foto-Fast Copy Shop provides a variety of photocopying and printing services. On June 5, the owner invested in some computer-aided photography equipment that enables customers to reproduce a picture or illustration, input it digitally into the computer, enter text into the computer, and then print out a four-color professional quality brochure. Prior to the purchase of this equipment, Foto-Fast Copy Shop's overhead averaged $43,200 per year. After the installation of the new equipment, the total overhead increased to $93,600 per year. Foto-Fast Copy Shop has always costed jobs on the basis of actual materials and labor plus overhead assigned using a predetermined overhead rate based on direct labor hours. Budgeted direct labor hours for the year are 7,200, and the wage rate is $7 per hour.

Required:

1. What was the predetermined overhead rate prior to the purchase of the new equipment?
$ per direct labor hour

2. What was the predetermined overhead rate after the new equipment was purchased?
$ per direct labor hour

3. Suppose Rick Anselm brought in several items he wanted photocopied. The job required 800 sheets of paper at $0.02 each and 48 minutes of direct labor time. What would have been the cost of Rick's job on May 20? On June 20? If required, round your answers to the nearest cent.

	Total job cost
May 20	$
June 20	$

4. Suppose that the owner decides to calculate two overhead rates, one for the photocopying area based on direct labor hours as before, and one for the computer-aided printing area based on machine time. Estimated overhead applicable to the computer-aided printing area is $50,400, and forecasted usage of the machines is 2,200 hours. What are the two overhead rates? If required, round your answers to the nearest cent.

	Overhead Rate
Photo-copying	$	per direct labor hour
Computer-aided printing	$	per machine hour

Which overhead rate system is better—one rate or two?

Answer 1

Question 1

Predetermined Overhead Rate prior to Purchase of Equipment = Budget Overhead before Purchase / Total Estimated Direct Labour Hours

Budgeted Overhead before Purchase = $ 43,200

Total Estimated Direct Labour Hours = 7,200 Hours

Predetermined Overhead Rate prior to Purchase of Equipment = 43,200/7,200

Predetermined Overhead Rate prior to Purchase of Equipment = $ 6 per DLH

Question 2

Predetermined Overhead Rate after Purchase of Equipment = Total Overhead after Purchase / Total Estimated Direct Labour Hours

Total Overhead after Purchase = 93,600

Total Estimated Direct Labour Hours = 7,200 Hours

Predetermined Overhead Rate after Purchase of Equipment = 93,600 / 7,200

Predetermined Overhead Rate after Purchase of Equipment = $ 13 per DLH

Question 3

May 20

Particulars	Amount
Direct Materials	16
Direct Labour	5.60
Manufacturing Overhead	4.80
Total Job Cost	26.4

Direct Materials Cost = 800 Sheet * $ 0.02 per Sheet = $ 16

Direct Labour = 0.8 Hours * $ 7 per Hour = $ 5.60

Manufacturing Overhead = 0.8 Hours * $ 6 per Hour = $ 4.8

On June 20

Particulars	Amount
Direct Materials	16
Direct Labour	5.60
Manufacturing Overhead	10.40
Total Job Cost	32

Manufacturing Overhead = 0.8 Hours * $ 13 per Hour = $ 10.40

Question 4

Total Overhead = $ 93,600

Computer Aided Overhead = $ 50,400

Photo Copying Overhead = Total Overhead - Computer Aided Overhead

Photo Copying Overhead = 93,600 - 50,400 = $ 43,200

Overhead rate for Photocopying = Overhead for Photocopying / Total Direct Labour Hours

Overhead Rate for Photocopying = 43,200 / 7,200 = $ 6 per DLH

Overhead rate for Computer Aided Printing = Overhead for Computer Aided Printing / Total Machine Hours

Overhead Rate for Computer Aided Printing = 50,400 / 2,200 = $ 22.91 per Machine Hour