Question

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)	$750,000	$330,000
Normal activity (machine hours)	6,000	10,000
Normal activity (direct labor hours)	2,000	1,000

Required:

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

2. Compute predetermined overhead rates for each department using machine hours for Department A and direct labor hours for Department B. (Note: Carry your calculations out to the nearest dollar.)

3. Job 73 used 25 machine hours from Department A and 50 machine hours from Department B; it used 30 direct labor hours from Department A and 20 direct labor hours from Department B. Job 74 used 40 machine hours from Department A and 15 machine hours from Department B; it used 20 direct labor hours from Department A and 50 direct labor 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.

Job 73 Plantwide	Job 73 Departmental
Job 74 Plantwide	Job 74 Departmental

4. Using a Plantwide, if actual machine hours for the year were 17,000 hours and actual overhead costs were $1,100,000, how much was overhead under- or over-applied for the year and how would that affect Cost of Goods Sold when it is closed to that account. $$_________________________ over-applied/under-applied (circle one) $$_________________________ Cost of Goods Sold increased/decreased (circle one)

Answer 1

1	Predetermined Plantwide overhead rate based on machine hours.
	Total Overheads cost (a)	$           1,080,000	[=750000+330000]
	Machine hours (b)	16000	[=6000+10000]
	Plantwide Overhead rate (a/b)	$                     67.5
2	Predetermined departmnetal overhead rate
	Particulars	Department A	Department B
	Total Overheads cost (a)	$              750,000	$                        330,000
	Machine hours (b)	6000	10000
	Labour hours (c)	2000	1000
	Department A Overhead rate (a/b)	$                       125
	Department B Overhead rate (a/c)		$                                330
3	Overhead cost for Job
	Particulars	Job 73	Job 74
	Machine hours - Department A (a)	25	40
	Machine hours - Department B (b)	50	15
	Labour hours - Department A (c )	30	20
	Labour hours - Department B (d)	20	50
	Plantwide Overhead rate	$                     67.5	$                               67.5
	Overheads cost - Plantwide ((a+b)*67.5)	$                   5,063	$                            3,713
	Department A Overhead rate based on machine hour ( e)	$                       125	$                                125
	Department B Overhead rate based on Labour hours (f)	$                       330	$                                330
	Department A Overhead Cost (g)= (a*e)	$                   3,125	$                            5,000
	Department B Overhead Cost (h)= (d *f)	$                   6,600	$                          16,500
	Overheads cost - Departmental (g+h)	$                   9,725	$                          21,500
	Job 73 Plantwide	$                   5,063	Job 73 Departmental	$    9,725
	Job 74 Plantwide	$                   3,713	Job 74 Departmental	$ 21,500
4
	Actual Machine Hours (a)	17000
	Plantwide Overhead rate (b)	$                     67.5
	Absorbed Overheads (c= a*b)	$       1,147,500.0
	Actual overhead costs (d)	$       1,100,000.0
	Overabsorbed overheads (e= c-d)	$             47,500.0
	Overheads has been overabsorbed, So Cost of Goods Sold has been increased 47500. Now Cost of Goods sold will be reduced by 47500 when adjustment is made for overabsorbed overheads
	$$_47500_ over-applied
	$$_ 47500_ Cost of Goods Sold increased