Question

Wilmington Company has two manufacturing departments--Assembly and Fabrication. It considers all of its manufacturing overhead costs to be fixed costs. The first set of data that is shown below is based on estimates from the beginning of the year. The second set of data relates to one particular job completed during the year--Job Bravo.

Estimated Data	Assembly		Fabrication		Total
Manufacturing overhead costs	$	3,960,000	$	4,400,000	$	8,360,000
Direct labor-hours		110,000		66,000		176,000
Machine-hours		44,000		220,000		264,000

Job Bravo	Assembly	Fabrication	Total
Direct labor-hours	23	15	38
Machine-hours	15	18	33

Required:

1. Assume Wilmington uses a plantwide predetermined overhead rate based on direct labor-hours. Calculate the predetermined overhead rate and the amount of manufacturing overhead applied to Job Bravo.

2. Assume Wilmington uses departmental predetermined overhead rates with direct labor-hours as the allocation base in Assembly and machine-hours as the allocation base in Fabrication. Calculate the predetermined overhead rate for each department and the manufacturing overhead applied to Job Bravo using departmental rates.

(Round your intermediate calculation to 2 decimal places.)

3. Do you recommend that Wilmington use a plantwide overhead rate or departmental overhead rates? Why?

Answer 1

Answer

1.

Predetermined overhead rate = Estimated total manufacturing overhead / Estimated total Labor hours

= 8,360,000 / 176,000

Predetermined overhead rate = $47.5 per Direct labor hour

Amount of Manufacturing overhead applied to Job Bravo = Direct Labor hours * Predetermined overhead rate

= 38 Labor hours * $47.5

Amount of Manufacturing overhead applied to Job Bravo = $1,805

2.

Predetermined overhead rate according to Assembly

Predetermined overhead rate = Estimated manufacturing overhead / Estimated Labor hours

= 3,960,000 / 110,000

Predetermined overhead rate according to Assembly = $36

Predetermined overhead rate according to Fabrication

Predetermined overhead rate = Estimated manufacturing overhead / Estimated Labor hours

= 4,400,000 / 66,000

Predetermined overhead rate according to Fabrication = $66.67

Amount of Manufacturing overhead applied to Job Bravo

= (Assembly Direct Labor Hours * Predetermined overhead rate of Assembly) + (Fabrication Direct Labor Hours * Predetermined overhead rate of Fabrication)

= (23 hours * $36) + (15 hours * $66.67)

Amount of Manufacturing overhead applied to Job Bravo= $1,828.05

3.

It is recommended to use Departmental Overhead Rate as it will result is fair allocation of Cost according to the Direct Labor hours consumed by the Job Bravo. As we can see that Job Bravo used 23 LH of Assembly and 15 LH of Fabrication so Departmental Overhead rate will give us more clear picture about how much Direct Labor Cost is incurred in Job Bravo.

Plantwide overhead rate will give us the total cost of Direct labor incurred on Job but Departmental overhead rate will give us more clear picture.