Question

Departmental Overhead Rate: Home Run Practice Problem

Fairfield Manufacturing currently allocates manufacturing overhead costs by plant-wide overhead rate using direct labor costs. D. Shim, a controller argues for departmental overhead rates to allocate manufacturing overhead costs to products. For department overhead rates, manufacturing overhead costs are allocated on the basis of machine hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 20X3, the following estimates were provided for the coming year:

	Machining	Assembly	Total
Direct labor-hours	60,000	120,000	180,000
Machine-hours	160,000	40,000	200,000
Direct labor cost	$1,000,000	$1,800,000	2,800,000
Manufacturing overhead costs	$840,000	$480,000	1,320,000

During month of the March, The accounting records of the company show the following data for Job #101:

	Machining	Assembly
Direct labor-hours	240	140
Machine-hours	120	10
Direct material cost	$600	$400
Direct labor cost	$200	$800

• Part A) For Fairfield Manufacturing,

• 1) Compute the plant-wide manufacturing overhead rate?

• 2) What are the total manufacturing costs of Job #101?

Part B) For Department Overhead Rate

• 1) Compute manufacturing overhead rate for each department.

• 2) What amount of manufacturing overhead costs will be allocated to Job #101?

• 3) Amounts at the end of 20X3 are as follows:

	Machining	Assembly
Direct labor-hours	60,000	250,000
Machine-hours	170,000	50,000
Direct labor cost	$1,000,000	$1,800,000
Manufacturing overhead	$900,000	$800,000

costs incurred

• Compute the under- or over-allocated manufacturing overhead for each department and for the whole plant.

• Part C) Provide possible reasons why Fairfield Manufacturing uses two different cost allocation rates.

Answer 1

Part A

Answer 1 and 2
Use of a plant wide overhead rate
Expected Manufacturing overhead			1,320,000
Divided by: Expected Direct cost			2,800,000
Overhead rate per labor hour			47.14286%
	Machining	Assembly	Total
Direct materials	600	400	$                1,000
Direct labor	200	800	$                1,000
Manufacturing overhead (1000*47.14286%)			$                    471
Total Manufacturing cost			$                2,471

Part B

Answer 3 and 4
Use of a departmental overhead rate
	Machining	Assembly	Total
Applicable hours	Machine hours	Labor hours
Expected Manufacturing overhead	840,000	480,000
Divided by: Applicable hours	200,000	180,000
Overhead rate on labor Cost	$   4.200000	$   2.666667
Per	Per MH	Per DLH
Quantity of Applicable hours	120	140
Multiply: Overhead rate on labor Cost	$            4.20	$   2.666667
manufacturing overhead costs will be allocated to Job #101	$              504	$              373

Answer 5

	Machining	Assembly	Total
Quantity of Applicable hours	170,000	250,000
Multiply: Overhead rate on labor Cost	$            4.20	$   2.666667
Overhead applied	714,000	666,667
Actual manufacturing overhead	900,000	800,000
Less: applied overhead	714,000	666,667
Under (over) allocated manufacturing overhead	186,000	133,333
Under allocated manufacturing overhead	186,000	133,333

Part C

Manufacturing overhead in Machining department is changed with change in the volume of machine hours.

Manufacturing overhead in Assembly department is changed with change in the volume of direct hours.

Using the two different cost allocation rates, company will get the accurate allocation of overhead

Company should use the two different cost allocation rates.