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		7,400		61,000
Machine-hours		50,700		3,000
Total fixed manufacturing overhead cost	$	390,000	$	412,000
Variable manufacturing overhead per machine-hour	$	3.00		—
Variable manufacturing overhead per direct labor-hour		—	$	4.75

Required:

1. Compute the predetermined overhead rate for each department.

2. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

	Department
	Cutting				Finishing
Direct labor-hours			4				18
Machine-hours			83				6
Direct materials		$	710			$	390
Direct labor cost		$	96			$	432

Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.

3. 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

Solution 1:

Computation of departmental Overhead rate
	Cutting	Finishing
Variable Manufacturing Overhead (Rate*Base hours)	$1,52,100	$2,89,750
Fixed Manufacturing Overhead	$3,90,000	$4,12,000
Total Overhead Costs	$5,42,100	$7,01,750
/ Machine Hours	50700
/ Direct Labor hours		61000
Departmental Overhead rate	$10.69	$11.50

Solution 2:

Allocation of Overhead to Job 203
	Fabricating	Finishing
Machine Hours	83
Direct labor hours		18
* Departmental Overhead rate	$10.69	$11.50
Allocated Overhead	$887	$207
Total Overhead Applied = $887 + $207= $1094

Computation of Total Manufacturing Cost
Direct Materials	$1,100
Direct Labor Cost	$528
Overhead	$1,094
Total Manufacturing Cost	$2,722

Solution 3:

Yes, there would be 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?