Question

Ryan Corporation manufactures auto steering systems. Prime cost and machine time estimates for one unit of the product for the year follow:

Direct materials	$	340
Direct labor ($26/hour)	$	650
Machine hours		20

This product requires 15 hours of direct labor in Department A and 10 hours in Department B. Also, it requires 5 machine hours in Department A and 15 machine hours in Department B. Using output as the activity, the factory overhead costs estimated in these two departments follow:

	A				B
Variable cost	$	360,000			$	220,000
Fixed cost		108,000				177,000

Management expects the firm to produce 1,000 units during the year.

Required:

1. Assume the total actual overhead base used was equal to the estimated base for the 1,000 units produced. Assume that factory overhead was applied on the basis of direct labor hours. Compute the predetermined plantwide factory overhead rate.

2. If factory overhead were applied on the basis of machine hours, what would be the plantwide overhead rate?

3. If the company produced 1,000 units during the year, what was the total amount of applied factory overhead in each department in requirements 1 and 2?

5. Compute the departmental overhead rate and amount of applied overhead for Department A using direct labor hours as the allocation base and for Department B using machine hours as the allocation base.

Answer 1

1. Plantwide factory overhead rate on the basis of direct labor hours = $34.6 per direct labor hour

2. Plantwide factory overhead rate on the basis of machine hours = $43.25 per machine hour

3. Total amount of applied factory overhead in each department

Based on	A	B
Direct Labor hours	$519,000	$346,000
Machine hours	$216,250	$648,750

5. Departmental overhead rate and amount of overhead for Department A using direct labor hours and for Department B using machine hours.

	A	B
Using labor hours	$31.2 per direct labour hour	-
Using Machine hours	-	$26.47 per machine hour

The detailed working is attached.