Question

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Requirements -X 1. Compute the plantwide overhead rate assuming that Donovan expects to incur 28,000 total DL hours during the year. 2. Compute departmental overhead rates assuming that Donovan expects to incur 16,000 MH in the Machining Department and 19,000 DL hours in the Finishing Department during the year. 3. If Donovan continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455? 4. If Donovan uses departmental overhead rates, how much MOH would be allocated to Job 450 and Job 455? 5. Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either job? Explain. If Donovan sells his furniture at 125% of cost, will his choice of allocation systems affect product pricing? Explain. Print Done

Answer 1

Requirement 1

Plantwide Overhead Rate = Total Manufacturing Overheads / Total Estimated Direct Labour Hours

Total Manufacturing Overheads = $ 12,50,000

Total Direct Labour Hours = 28,000

Plantwide Overhead Rate = 12,50,000 / 28,000

Plantwide Overhead Rate = $ 44.64 per Direct Labour Hour

Requirement 2

Formula for Calculating Department Overhead Rate = Total Manufacturing Overhead for Each Department / Total Direct Labour Hours or Total Machine Hours

For Machining Department

Total Manufacturing Overheads for Machining Department = $ 875,000

Total Machine Hours = 16,000

Department Overhead Rate for Machining Department per Machine Hour = 875,000 / 16,000 = $ 54.69

For Finishing Department

Total Manufacturing Overheads = $ 375,000

Total Direct Labour Hours = 19,000 Hours

Department Overhead Rate for Finishing Department per Direct Labour Hour = 375,000 / 19,000 = $ 19.74

Requirement 3

Manufacturing Overhead applied to Jobs based on Plantwide Overhead Rate

Particulars	Job 450	Job 455
Plantwide Overhead Rate	44.64	44.64
Direct Labour Hours	10	10
Manufacturing Overhead Applied	446.43	446.43

Manufacturing Overhead Applied = Plantwide Overhead Rate * Direct Labour Hours

Requirement 4

For Job 450

Particular	Machining Department	Finishing Department
Labour Hours / Machine Hours	4	9
Department Overhead Rate	54.69	19.74
Manufacturing Overhead Applied	218.75	177.63

Total Manufacturing Overhead Applied = 218.75 + 177.63 = $ 396.38

Manufacturing Overhead Applied = Machine Hours for Machining Department * Department Overhead Rate for Machining Department

Manufacturing Overhead applied = Labour Hours for Finishing Department * Department Overhead Rate for Finishing Department

For Job 455

Particular	Machining Department	Finishing Department
Labour Hours / Machine Hours	6	8
Department Overhead Rate	54.69	19.74
Manufacturing Overhead Applied	328.13	157.89

Total Manufacturing Overhead Applied = 328.13 + 157.89 = $ 486.02

Manufacturing Overhead Applied = Machine Hours for Machining Department * Department Overhead Rate for Machining Department

Manufacturing Overhead applied = Labour Hours for Finishing Department * Department Overhead Rate for Finishing Department

Requirement 5

Particulars	Job 450	Job 455
Manufacturing Overhead Applied as per Plantwide Overhead Rate	446.43	446.43
Manufacturing Overhead Applied as per Department Overhead Rate	396.38	486.02
Overapplied (Underapplied)	50.05	(39.59)

Overhead Overapplied (Underapplied) = Overheads allocated as per Plantwide Overhead Rate - Overheads allocated as per Department Overhead Rae

The Single Plantwide Rate overcoats job 450 by $ 50.05 and undercosts Job 455 by $ 39.59 .

If Donovan set his sales price at 125% of Costs the job cost is affected by the allocation system he chooses and sales price will also be affected by allocation system he chooses.

Notes Regarding All the Calculation Work

As most of the Calculation was in decimal and the decimal has been round off upto two decimal places so there are Normal Rounding off being done to adjust it. Please look for that and clarify in case of any problem.