Question

Multiple Production Department Factory Overhead Rates

Spotted Cow Dairy Company manufactures three products—whole milk, skim milk, and cream—in two production departments, Blending and Packing. The factory overhead for Spotted Cow Dairy is $299,700.

The three products consume both machine hours and direct labor hours in the two production departments as follows:

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The management of Spotted Cow Dairy Company now plans to use the multiple production department factory overhead rate method. The total factory overhead associated with each department is as follows:

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Required:

1. Determine the multiple production department factory overhead rates, using machine hours for the Blending Department and direct labor hours for the Packing Department.

Blending Department	$  per machine hour
Packing Department	$  per direct labor hour

2. Determine the product factory overhead costs, using the multiple production department rates in (1).

	Whole Milk	Skim Milk	Cream
Blending Department factory overhead	$	$	$
Packing Department factory overhead
Total factory overhead	$	$	$

Answer 1

Concepts and reason

Factory overhead costs: Manufacturing overhead costs are the indirect cost incurred to produce the goods. These cost includes do not direct material and direct labor costs. Direct material and direct labor costs are direct manufacturing costs. Manufacturing costs could be fixed cost or variable costs. Manufacturing overhead do not directly relate to the production of goods but are required so as to run the manufacturing operation. Examples of manufacturing overhead cost include depreciation, indirect labor costs, indirect material costs, factory rent expenses and so on.

Fundamentals

Predetermined overhead rate: Predetermined overhead rate is used to calculate overhead to be applied to products manufactured. The actual overhead would be determined at year end after all the costs are incurred and so company uses predetermined overhead rate to calculate overhead that should be applied to the products in order to calculate the estimate cost of the product. The predetermined overhead rate is calculated at beginning of the year using estimated manufacturing overhead and the estimated allocation base. The manufacturing overhead can be applied based on common allocation base which may differ from company to company, some may use direct labor hours as allocation base and others may use the machine labor hours as allocation base. The predetermined overhead rate is multiplied with actual volume of allocation base to calculate applied manufacturing costs.

Departmental predetermined overhead rate: In departmental predetermined overhead rate, company calculates multiple overhead rate to apply manufacturing overhead to different departments of the company. For each department company would estimate the manufacturing overhead and estimate the allocation base to calculate predetermined overhead rate.

(1)

Calculation of multiple production department factory overhead rate for blending department.

Calculation of multiple production department factory overhead rate for packing department.

Thus, multiple production department factory overhead rate for blending department is $110 per machine hour and for packing department is $135 per direct labor hour.

(2)

Calculation of product factory overhead cost is shown below

Thus, factory overhead for whole milk is $134,950, for skim milk is $118,600 and for cream is $46,150.

Ans: Part 1

Multiple production department factory overhead rate for blending department is $110 per machine hour and for packing department is $135 per direct labor hour.

Part 2