Question

Overhead Applied to Jobs, Departmental Overhead Rates

Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xania’s plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

	Department A		Department B
Overhead costs (expected)	$100,000		$61,000
Normal activity (machine hours)	18,000		14,800

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. Round your answer to two decimal places.
$ per machine hour

2. Compute predetermined overhead rates for each department using machine hours. (Note: Round to two decimal places, if necessary.)

Department A	$ per machine hour
Department B	$ per machine hour

3. Conceptual Connection: Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Round final answers to the nearest cent, if necessary.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

Which of the two approaches gives the fairer assignment?
Departmental rates

4. Conceptual Connection: Repeat Requirement 3, assuming the expected overhead cost for Department B is $86,000 (not $61,000). Round overhead rates to the nearest cent.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

For this company, would you recommend departmental rates over a plantwide rate?
Yes

Answer 1

Solution 1:

predetermined overhead rate for the plant as a whole based on machine hours = Estimated overhead / Estimated machine hours

= $161,000 / 32800 = $4.91 per machine hour

Solution 2:

Computation of Departmental Overhead rates
Particulars	Department A	Department B
Overhead Cost (Expected)	$100,000.00	$61,000.00
Machine hours	$18,000.00	$14,800.00
Overhead rate per machine hour	$5.56	$4.12

solution 3:

Computation of overhead cost assigned to each Job - Plant wide
Particulars	Job 73	Job 74
Machine hours - Deptt A	20	50
Machine hours - Deptt B	50	20
Total Machine hours	70	70
Overhead rate	$4.91	$4.91
Overhead assigned	$343.70	$343.70

Computation of overhead cost assigned to each Job - Departmental overhead rate
Particulars	Job 73	Job 74
Machine hours - Deptt A	20	50
Machine hours - Deptt B	50	20
Overhead rate - Deptt A	$5.56	$5.56
Overhead rate - Deptt B	$4.12	$4.12
Overhead assigned - Deptt A	$111.20	$278.00
Overhead assigned - Deptt B	$206.00	$82.40
Total Overhead assigned	$317.20	$360.40

Solution 4:

New plant wide overhead rate = Estimated overhead / Estimated machine hours

= $186,000 / 32800 = $5.67 per machine hour

Computation of Departmental Overhead rates
Particulars	Department A	Department B
Overhead Cost (Expected)	$100,000.00	$86,000.00
Machine hours	$18,000.00	$14,800.00
Overhead rate per machine hour	$5.56	$5.81

Computation of overhead cost assigned to each Job - Plant wide
Particulars	Job 73	Job 74
Machine hours - Deptt A	20	50
Machine hours - Deptt B	50	20
Total Machine hours	70	70
Overhead rate	$5.67	$5.67
Overhead assigned	$396.90	$396.90

Computation of overhead cost assigned to each Job - Departmental overhead rate
Particulars	Job 73	Job 74
Machine hours - Deptt A	20	50
Machine hours - Deptt B	50	20
Overhead rate - Deptt A	$5.56	$5.56
Overhead rate - Deptt B	$5.81	$5.81
Overhead assigned - Deptt A	$111.20	$278.00
Overhead assigned - Deptt B	$290.50	$116.20
Total Overhead assigned	$401.70	$394.20