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 8,100 74,000 Machine-hours 53,600 1,700 Total fixed manufacturing overhead cost $ 380,000 $ 471,000 Variable manufacturing overhead per machine-hour $ 3.00 — Variable manufacturing overhead per direct labor-hour — $ 3.75 Required: A. Compute the predetermined overhead rate for each department.

B. The job cost sheet for Job 203, which was started and completed during the year, showed the following: Department Cutting Finishing Direct labor-hours 6 14 Machine-hours 86 3 Direct materials $ 700 $ 360 Direct labor cost $ 126 $ 294 Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.

C. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?

Answer 1

	A. Computation of Pre Determined Overhead Rate for Each Department
					Cutting	Finishing
	Total Fixed Manufacturing Overhead				$ 3,80,000.00	$ 4,71,000.00
	Machine Hours for Cutting Dep.				53600
	Direct Labour Hours for Finishing Dep.					74000
	Predetermined Overhead rate				$               7.09	$               6.36
	B. Total Manufacturing Cost for Job 203
					Cutting	Finishing	Total
	Variable Cost:
	Direct Material				$           700.00	$           360.00	$ 1,060.00
	Direct Labour				$           126.00	$           294.00	$     420.00
	Variable Maufacturing Overhead:
	Per Direct Labour Hour((6+14)*3.75)						$       75.00
	Per Machine Hour((86+3)*3)						$     267.00
	Fixed Manufacturing Overhead:
	Per Direct Labour Hour - Finishing Dep(14*6.36)					$             89.11	$       89.11
	Per Machine Hour - Cutting Dep.(86*7.09)				$           609.70		$     609.70
	TOTAL COST						$ 2,520.81
	C.
	Calculation of Plant Wide Overhead Rate Based on Direct Labour Hour
	Total Fixed Overhead			=$380000+$471000		$ 8,51,000.00
	Total Direct Labour Hours			=8100+74000		82100
	Plant Wide Overhead Rate					$ 10.37
	From the above, it is clear that if Plant wide overhead rate was used in place of departmental overhead rates,different amount of overhead expenses would be allocated to Different Jobs causing miscalculations of Total Costs for jobs. It would be beneficial to use Departmental Overhead as these are more representative of Cost Allocation To jobs.