Question

XYZ uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Lola Katz, the plant manager, has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Some jobs spend most of their time in Department A, while others spend most of their time in Department B. XYZ has the following data for its two departments for the coming year:

	Department A	Department B
Expected overhead cost	$1,000,000	$200,000
Expected machine hours	5,000	10,000

A.	Compute the plantwide overhead rate.
B.	Compute the departmental overhead rates.
C.	In department A the actual machine hours used for product one was 4,000 and for product two was 1,000. In department B the actual machine hours used for product one was 2,000 and for product two 8,000. Using a plantwide overhead rate how much overhead would be given to product one and how much overhead would be given to product two? If departmental overhead allocation rates are used how much overhead is given to product one and how much overhead is given to product two?

Answer 1

Compute the plantwide overhead rate.

Total Overhead cost /Total machine Hour

=(1000000+200000)/(5000+10000)

=$1200000/15000 Mh

=$ 80 /Mh

Compute the departmental overhead rates.

	Department A	Department B
Expected overhead cost A	$1,000,000	$200,000
Expected machine hours B	5,000	10,000
Departmental overhead rates A/B	$             200.00	$           20.00

c

Using a plantwide overhead rate

	product one	product Two
Hour Used	6000	9000
Plant wide overhead rate	80	80
Overhead Applied	$   480,000.00	$                      720,000.00

Using a Department wise overhead rate

	product one	Departmental overhead rates
Department A	4000	$                             200.00	$800,000.00
Department B	2000	$                              20.00	$ 40,000.00
Overhead Applied			$840,000.00
	product Two	Departmental overhead rates
Department A	1000	$                             200.00	$200,000.00
Department B	8000	$                              20.00	$160,000.00
Overhead Applied			$360,000.00