Question

Departmental Overhead Rates

Mariposa, Inc., produces machine tools and currently uses a plantwide overhead rate, based on machine hours. Harry Whipple, the plant manager, has heard that departmental overhead rates can offer significantly better cost assignments than can a plantwide rate.

Mariposa has the following data for its two departments for the coming year:

	Department A	Department B
Overhead costs (expected)	$480,000	$120,000
Normal activity (machine hours)	100,000	50,000

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours.
$ per machine hour

2. Compute predetermined overhead rates for each department using machine hours. Round your answers to one decimal place.

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

3. Suppose that a machine tool (Product X75) used 70 machine hours from Department A and 160 machine hours from Department B. A second machine tool (Product Y15) used 160 machine hours from Department A and 70 machine hours from Department B. Compute the overhead cost assigned to each product using the plantwide rate computed in Requirement 1.

	Product X75	Product Y15
Plantwide:	$	$

Repeat the computation using the departmental rates found in Requirement 2.

	Product X75	Product Y15
Departmental:	$	$

Which of the two approaches gives the fairest assignment?

4. Repeat Requirement 3 assuming the expected overhead cost for Department B is $240,000.

	Product X75	Product Y15
Plantwide:	$	$
Departmental:	$	$

Would you recommend departmental rates over a plantwide rate?

Answer 1

1. Predetermined overhead rate for the plant as a whole based on machine hours

Total expected overheads / Total machine hours = ($480000 + $120000)/(100000 + 50000) = $600000/150000 = $4 per machine hour

2. Predetermined overhead rate for each department

Department A: $480000/100000 = $4.80 per machine hour

Department B: $120000/50000 = $2.40 per machine hour

3. Using plant-wide overhead rate:

Product X75: (70 + 160) hours x $4 = 230 hours x $4 = $920

Product Y15: (160 + 70) hours x $4 = 230 hours x $4 = $920

Using departmental overhead rates:

Machine Tool	Department A			Department B			Total
	Machine hours	Overhead rate	Total overheads	Machine hours	Overhead rate	Total overheads	Overheads $
Product X75	70	4.80	336	160	2.40	384	720
Product Y15	160	4.80	768	70	2.40	168	936

The departmental rates give the fairest assignment since the overhead costs are assigned to the product based on the resources (machine hours in this case) utilized by each product.

4. Overhead rate for Department B = $240000/50000 = $4.80 per machine hour

Machine Tool	Department A			Department B			Total
	Machine hours	Overhead rate	Total overheads	Machine hours	Overhead rate	Total overheads	Overheads $
Product X75	70	4.80	336	160	4.80	768	1104
Product Y15	160	4.80	768	70	4.80	336	1104

The plant-wide rate would also be ($480000 + $240000)/(100000 + 50000) = $720000/150000 = $4.80 per machine hour

Since the departmental and plantwide overhead rates would be the same, the plant-wide rate may be used so as to reduce calculating department wise.