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	$	310
Direct labor ($23/hour)	$	575
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	$	315,000			$	190,000
Fixed cost		105,000				174,000

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

Answer :

1.predetermined plantwide factory overhead rate

= Estimated  Factory overhaed / Estimated allocation base ( Direct Labor hour)

= Variable cost + Fixed cost / Estimated allocation base ( Direct Labor hour)

= ( $ 315000+ $ 190000 ) + ( $ 105000 + $ 174000) / 1000 unit* 25 hour

= $ 784000/ 25000 hour

= $ 31.36 per direct labor hour

2.plantwide overhead rate

= Estimated  Factory overhaed / Estimated allocation base ( Machine hour)

= ( $ 315000+ $ 190000 ) + ( $ 105000 + $ 174000) / 1000 unit* 20 hour

= $ 784000/ 20000 hour

= $ 39.20 per machine hour

3.

(a) total amount of applied factory overhead if direct labor hour plantwide overhead rate is used

	A	B
Units produced	1000	1000
Direct labor hour per unit	15 hour	10 Hour
Total Direct labor hour (a)	15000 hour	10000 hour
Factory overhead applied (a) * $ 31.36	$ 470400	$ 313600

b) total amount of applied factory overhead if machine  hour plantwide overhead rate is used

	A	B
Units produced	1000	1000
Machie hour per unit	5 hour	15 Hour
Total machine hour (a)	5000 hour	15000 hour
Factory overhead applied (a)* $ 39.20	$ 196000	$ 588000

5. Computation of Departmental overhead rate

	A	B
Variable cost	$ 315000	$ 190000
Fixed cost	$ 105000	$ 174000
Total overhead cost estimated (a)	$ 420000	$ 364000
Estimated allocation base (b)	15000	15000
	Direct labor hour	Machine hour
Departmental overhead rate (a) /(b)	$ 28 per DL	$ 24.26666 per MH

Overhead applied as per Departmental rate ,

	A	B
Overhead applied as per Departmental rate ,	$ 420000	$ 364000 ( Approx)
	15000 *$ 28	15000* $ 24.26666