Question

Dillon Pty Ltd. Manufactures a complete line of fibreglass attaché cases and suitcases. The firm has three manufacturing departments: moulding, component and assembly. There are also two support departments: power and maintenance. The sides of the cases are manufactured in the moulding department. The frames, hinges and locks are manufactured in the component department. The cases are completed in the assembly department. Varying amounts of materials and time are required to manufacture each type of case.

Dillon has always used a plantwide overhead rate. Direct labour hours are used to assign overhead to products. The predetermined overhead rate is calculated by dividing the company’s total estimated overhead by the total estimated direct labour hours to be worked in the three manufacturing departments.

Chris Bowen, manager of cost accounting, has recommended that Dillon use departmental overhead rates. The planned operating costs and expected levels of activity for the coming year have been developed by Bowen and are presented by department in the following schedules. (All numbers are in thousands.)

	Manufacturing departments
	Moulding	Component	Assembly
Departmental activity measures:             Direct labour hours             Machine hours	500 875	2 000 125	1 500 0
Departmental costs:             Direct material             Direct labour             Manufacturing overhead	$12 400 3 500 21 000	$30 000 20 000 16 200	$1 250 12 000 22 600
Total departmental costs	$36 900	$66 200	$35 850

	Use of support departments
	Moulding	Component	Assembly
Maintenance:             Estimated usage in labour hours for the             coming year	90	25	10
Power (in kilowatt hours):             Estimated usage for the coming year	360	320	120

           

	Support departments
	Power	Maintenance
Departmental activity measures:             Estimated usage for the coming year	800kWh	125 labour hours
Departmental costs:             Material and supplies (variable)             Variable labour             Fixed overhead	$ 5 000 1 400 12 000	$ 1 500 2 250 250
Total Support department costs	$18 400	$4 000

Required:

1. (a) Calculate the plantwide overhead rate for Dillon for the coming year using the same           method as used in the past.

            (b) Estimate the overhead cost of an Elite attaché case that requires 4 direct labour hours and 5 machine hours in the moulding department, 3 direct labour hours in the component       department and 2 direct labour hours in the assembly department.

2. Chris Bowen has been asked to develop departmental overhead rates for comparison with the plantwide rate. The following steps are to be followed in developing the departmental rates:

1. Allocate the total maintenance costs to the three manufacturing departments, using direct method.
2. Allocate the power department costs to the three manufacturing departments, using the direct method.
3. Calculate departmental overhead rates for the three manufacturing departments, using a machine hour cost driver for the moulding department and a direct labour hour cost driver for the component and assembly departments.

3. Estimate the overhead cost of the Elite attaché case using the departmental overhead rates.

4. Should Dillon use a plantwide rate or departmental rates to assign overhead to products? Explain your answer.

Answer 1

Solution:

(a) Computation of plantwide overhead rate for Dillon Pty Ltd. = Total Overhead cost / Total Direct labour hours Plantwide Overhead Rate = $82,200 / 4,000 DLHS = $20.55 per DLHS

(b) Comparision between Plantwide and Departmental Overhead rates Departments Plantwide Departmental $82.20 $183.75 Moulding Department (4 DLHs * $20.55 per DLHS) (5 MHs * $36.75 per MHS) $61.65 $36.54 Component Department (3 DLHs * $20.55 per DLHS) (3 DLHs * $12.18 per DLHs) $41.10 $34.24 Assembly Department (2 DLHs * $20.55 per DLHS)(2 DLHs * $17.12 per DLHS) Estimated Overhead Cost $184.95 $254.53 of an Elite attache

Requirement a & b Allocation of Service department cost to Production Department By using Direct Method Basis of Manufacturing Department Support Department Allocation Moulding Component Assembly Power Maintenance Manufacturing Overhead Allocated $21,000 $16,200 $22,600 $18,400 $4,000 Allocation Power Dept. Kwh $8,280 $7,360 $2,760 $18,400 Allocation Maint. Dept. Labour hrs $2,880 $800 $320 -$4,000 Total Overhead Cost $32,160 $24,360 $25,680

c. Computation of Departmental Overhead Rate = Moulding Overhead cost / Machine hours Moulding Department = $32,160 / 875 MHS Overhead Rate = $36.75 per MHS = Component Overhead cost / Direct labour hours Component Department = $24,360 / 2,000 DLHS Overhead Rate = $12.18 per DLHS = Assembly Overhead cost / Direct labour hours Assembly Department = $25,680 / 1,500 DLHS Overhead Rate = $17.12 per DLHS