Question

Overhead Applied to Jobs, Departmental Overhead Rates

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)	$80,000		$78,000
Normal activity (machine hours)	14,500		10,800

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. Round your answer to two decimal places.
$fill in the blank 1 per machine hour

2. Compute predetermined overhead rates for each department using machine hours. (Note: Round to two decimal places, if necessary.)

Department A
Department B

3. Conceptual Connection: Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine 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. Round final answers to the nearest cent, if necessary.

	Job 73	Job 74
Plantwide
Departmental

Which of the two approaches gives the fairer assignment?

4. Conceptual Connection: Repeat Requirement 3, assuming the expected overhead cost for Department B is $103,000 (not $78,000). Round overhead rates to the nearest cent.

	Job 73	Job 74
Plantwide
Departmental

For this company, would you recommend departmental rates over a plantwide rate?

Answer 1

Requirement 1:

Predetermined overhead rate = Total Overhead cost / Total Machine hours

Total overhead cost = $80,000 + $78,000 = $158,000

Total machine hours = 14,500 + 10,800 = 25,300

Predetermined overhead rate = $158,000 / 25,300 machine hours = $6.25 per machine hour

Requirement 2:

Departmental overhead rate = Departmental overhead cost / Departmental machine hours

Department A's overhead rate = $80,000 / 14,500 machine hours = $5.52 per machine hour

Department B's overhead rate = $78,000 / 10,800 machine hours = $7.22 per machine hour

Requirement 3:

	Job 73	Job 74
Plantwide	$437.50	$437.50
Departmental	$471.40	$420.40

Working notes:

Plantwide

Job 73 = (20 + 50) machine hours * $6.25 per machine hour = $437.50

Job 74 = (50 + 20) machine hours * $6.25 per machine hour = $437.50

Departmental

Job 73 = (20 machine hours * $5.52) + (50 machine hours * $7.22) = $471.40

Job 74 = (50 machine hours * $5.52) + (20 machine hours * $7.22) = $420.40

Requirement 4:

	Job 73	Job 74
Plantwide	$506.10	$506.10
Departmental	$587.40	$466.80

Working notes:

Plantwide Predetermined overhead rate = ($80,000 + $103,000) / 25,300 machine hours = $7.23 per machine hour

Department A's overhead rate = $80,000 / 14,500 machine hours = $5.52 per machine hour

Department B's overhead rate = $103,000 / 10,800 machine hours = $9.54 per machine hour

Plantwide

Job 73 = (20 + 50) machine hours * $7.23 per machine hour = $506.10

Job 74 = (50 + 20) machine hours * $7.23 per machine hour = $506.10

Departmental

Job 73 = (20 machine hours * $5.52) + (50 machine hours * $9.54) = $587.40

Job 74 = (50 machine hours * $5.52) + (20 machine hours * $9.54) = $466.80

All the best...