In: Accounting
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 | 8,900 | 62,000 | ||
Machine-hours | 56,100 | 1,600 | ||
Total fixed manufacturing overhead cost | $ | 390,000 | $ | 488,000 |
Variable manufacturing overhead per machine-hour | $ | 2.00 | — | |
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 | 4 | 15 | ||||||
Machine-hours | 89 | 5 | ||||||
Direct materials | $ | 740 | $ | 360 | ||||
Direct labor cost | $ | 96 | $ | 360 | ||||
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.
Cutting Department:
Manufacturing Overhead Cost = Variable Manufacturing Overhead
Cost * Number of MH + Fixed Manufacturing Overhead
Manufacturing Overhead Cost = $2.00 * 56,100 + $390,000
Manufacturing Overhead Cost = $502,200
Predetermined Overhead Rate = Manufacturing Overhead Cost /
Number of MH
Predetermined Overhead Rate = $502,200 / 56,100
Predetermined Overhead Rate = $8.95 per MH
Finishing Department:
Manufacturing Overhead Cost = Variable Manufacturing Overhead
Cost * Number of DLH + Fixed Manufacturing Overhead
Manufacturing Overhead Cost = $3.75 * 62,000 + $488,000
Manufacturing Overhead Cost = $720,500
Predetermined Overhead Rate = Manufacturing Overhead Cost /
Number of MH
Predetermined Overhead Rate = $720,500 / 62,000
Predetermined Overhead Rate = $11.62 per DLH
Answer 2.
Cutting Department:
Direct Materials = $740
Direct Labor Cost = $96
Predetermined Overhead Rate = $8.95 per MH
Number of MHs = 89
Manufacturing Overhead = Predetermined Overhead Rate * Number of
MHs
Manufacturing Overhead = $8.95 * 89
Manufacturing Overhead = $796.55
Total Manufacturing Cost = Direct Materials + Direct Labor Cost
+ Manufacturing Overhead
Total Manufacturing Cost = $740 + $96 + $796.55
Total Manufacturing Cost = $1,632.55
Finishing Department:
Direct Materials = $360
Direct Labor Cost = $360
Predetermined Overhead Rate = $11.62 per DLH
Number of DLHs = 15
Manufacturing Overhead = Predetermined Overhead Rate * Number of
DLHs
Manufacturing Overhead = $11.62 * 15
Manufacturing Overhead = $174.30
Total Manufacturing Cost = Direct Materials + Direct Labor Cost
+ Manufacturing Overhead
Total Manufacturing Cost = $360 + $360 + $174.30
Total Manufacturing Cost = $894.30
Job 203:
Total Manufacturing Cost = Total Manufacturing Cost (Cutting
Department) + Total Manufacturing Cost (Finishing Department)
Total Manufacturing Cost = $1,632.55 + $894.30
Total Manufacturing Cost = $2,526.85
Answer 3.
Yes, we can expect differential amount of overhead cost to be assigned if predetermined overhead rate based on direct-labor hours is used as some job might have small amount of direct-labor hour.