Question

White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor-hours. At the beginning of the year, the company made the following estimates:

  

	Department
	Cutting		Finishing
Direct labor-hours		7,900		70,000
Machine-hours		63,900		3,700
Total fixed manufacturing overhead cost	$	400,000	$	522,000
Variable manufacturing overhead per machine-hour	$	3.00		-
Variable manufacturing overhead per direct labor-hour		-	$	2.75

  

Required:
1.	Compute the predetermined overhead rate to be used in each department. (Round your answers to 2 decimal places.)

        

2.	Assume that the overhead rates you computed in (1) above are in effect. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

    

	Department
	Cutting		Finishing
Direct labor-hours		3		18
Machine-hours		84		4
Materials requisitioned	$	790	$	360
Direct labor cost	$	44	$	150

    

Compute the total manufacturing cost assigned to Job 203. (Round your intermediate and final answers to 2 decimal places.)

         

3.	Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plant wide overhead rate based on direct labor-hours, rather than using departmental rates?
	No Yes

Answer 1

Answer 1:

Predetermined overhead rate for each department:

Predetermined overhead rate for Cutting = Estimated overhead for cutting department / Estimated machine-hours in Cutting department

= (400,000 + $3* 63900) / 63900

= $9.26

Predetermined overhead rate for Finishing = Estimated overhead for cutting department / Estimated labor-hours in Cutting department

= (522000 + 2.75 * 70000) /70000

= $10.21

Answer 2:

Manufacturing overhead applied in Cutting department = $9.26 * 84 = $777.84

Manufacturing overhead applied in Finishing department = $10.21 * 18 = $183.78

Answer 3:

Yes, we expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plant-wide predetermined overhead rate based on direct labor-hours, rather than using departmental rates.

For example let us take Job 203 as example:

Overhead assigned as per department overhead rates = 777.84 + 183.78 = $961.62

Plant-wide predetermined overhead rate based on direct labor-hours = Estimated plant wide overheads / Estimated plant wide labor hours

= (400000 + 522000 + 3 * 63900 + 2.75 * 70000) /(7900 + 70000)

= $16.77

Overhead applied using plant-wide predetermined overhead rate based on direct labor-hours = 16.77 * (3 + 18)

= $352.17

Difference in overhead applied = $961.62 - $352.17 = $609.45

We observe substantially different amounts of overhead cost to be assigned to Job 203 if the company used a plant-wide predetermined overhead rate based on direct labor-hours, rather than using departmental rates