Question

QUESTION 2

Dotsero Technology, Inc., has a job-order costing system. The company uses departmental predetermined overhead rates to apply manufacturing overhead cost to individual jobs. The predetermined overhead rate in Department A is based on machine hours, and the rate in Department B is based on direct labour hours. At the beginning of the most recent year (i.e., January 1, 2012), the company's management made the following estimates for the coming year:

                                                                        Department

                                                                        A                                 B

            Machine hours                                    80,000                         21,000

            Direct labour hours                             35,000                         65,000

            Direct materials cost                           $190,000                     $400,000

            Direct labour cost                               $280,000                     $530,000

            Manufacturing overhead cost             $416,000                     $720,000

Job 243 entered into production on April 1, 2012, and all 24 units of product in the job were completed on May 1, 2012. The company's cost records show the following information about the job:

                                                                        Department

                                                                        A                                 B

            Machine hours                                    350                              70

            Direct labour hours                             80                                130

            Direct materials cost                           $940                            $1,200

            Direct labour cost                               $710                            $980                       

At the end of the year (December 31, 2012), the records of Dotsero showed the following actual total cost and operating data for all jobs worked on during the year:

                                                                        Department

                                                                        A                                 B

            Machine hours                                    73,000                         24,000

            Direct labour hours                             30,000                         68,000

            Direct materials cost                           $165,000                     $420,000

            Direct labour cost                               $265,000                     $510,000

            Manufacturing overhead cost             $390,000                     $740,000

Required:

1. Compute the predetermined overhead rates for Department A and Department B at the beginning of the year 2012. ( 3 marks)

2. Compute the total overhead cost applied to Job 243 during the year 2012.   ( 2 marks) (b) What was the total cost of Job 243 once the job was completed? ( 2 mark)

3. Compute the amount of under-applied or over-applied overhead in each department, and in total, at the end of the current year (December 31, 2012). Based on this analysis, comment on the apparent relative quality of this job costing system for generating useful cost information. Briefly justify your answer. ( 5 marks)

4. Return to the original data at the beginning of the question. Assume that, instead of two separate departmental overhead rates, the company uses a single plant-wide overhead application rate based on direct materials cost as the allocation base. Compute the single predetermined overhead application rate for Dotsero Company as of the beginning of the year 2012, and the amount of overhead which would be applied to Job 243. ( 3 marks)

Answer 1

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Dotsero Technology, Inc.
Answer 1
Calculation of Departmental OH Rate	Dept. A	Dept. B	Note
Manufacturing overhead	416,000.00	720,000.00	A
Machine/ Direct Labor Hour	80,000.00	65,000.00	B
Departmental OH Rate	5.20	11.08	C=A/B
Answer 2
Allocated OH for Job 243	Dept. A	Dept. B	Total
Machine/ Direct Labor Hour	350.00	130.00		D
Departmental OH Rate	5.20	11.08		See C
Allocated OH	1,820.00	1,440.00	3,260.00	E=C*D
Answer 3	Dept. A	Dept. B	Note
Machine/ Direct Labor Hour	73,000.00	68,000.00	F
Departmental OH Rate	5.20	11.08	See C
OH applied	379,600.00	753,230.77	G=F*C
Actual OH	390,000.00	740,000.00	H
Difference	(10,400.00)	13,230.77	I=G-H
Remarks	Under applied	Over applied
Answer 4
Calculation of Plant wide OH Rate	Dept. A	Dept. B	Total	Note
Manufacturing overhead	416,000.00	720,000.00	1,136,000.00	See A
Direct materials cost	190,000.00	400,000.00	590,000.00	J
Predetermined OH Rate			1.93	K=A/J
Allocated OH for Job 243	Dept. A	Dept. B	Total
Direct materials cost	940.00	1,200.00	2,140.00	L
Departmental OH Rate			1.93	See K
Allocated OH			4,120.41	M=L*K