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		7,800		81,000
Machine-hours		51,300		3,800
Total fixed manufacturing overhead cost	$	360,000	$	493,000
Variable manufacturing overhead per machine-hour	$	4.00		—
Variable manufacturing overhead per direct labor-hour		—	$	3.75

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			6				17
Machine-hours			89				4
Direct materials		$	710			$	370
Direct labor cost		$	126			$	357

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?

Compute the predetermined overhead rate for each department. (Round your answers to 2 decimal places.)

Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203. (Round intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.)

Answer 1

1. The pre determined rate for each department is calculated as follows:

Particulars	Cutting	Finishing
Variable overhead rate(given)	4	3.75
Fixed manufacturing overheads	360000/51300 = 7.02	493000/81000 = 6.09
Total overhead pre determined rate	11.02	9.84

2. Total manufacturing cost assigned to Job 203:

Particulars	Cutting	Finishing
Direct materials	710	370
Direct labour	126	357
Share of Overhead cost	89 x 11.02 = 980.78	17x 9.84 = 167.28
Total cost	1816.78	894.28

Therefore the total cost assigned to Job 203 is 1816.78 + 894.28 = $2711.

3. Plant wide overhead rate = Total fixed manufacturing overheads / Total Direct labour hours

= (360000+493000) / (7800+81000)

= 9.60

Therefore plant wide overhead rate = $9.60

The cost of Job 230 if plant wide overhead rate is followed:

Particulars	Cutting	Finishing
Direct materials	710	370
Direct labour	126	357
Share of Overhead cost	6 x 9.6 = 57.6	17x 9.6 = 163.2
Total cost	893.6	890.2

Therefore the total cost assigned to Job 203 is 893.6 + 890.2 = $1784.

So there is a substantial change in cost allocated to jobs if we use plant wide pre-dertermined overhead rate.

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