Question

ClearCase Company manufactures display cases to be sold to retail stores. The cases come in three sizes: Large, Medium, and Small. Currently, ClearCase Company uses a single plant-wide overhead rate to allocate its $3,357,800 of annual manufacturing overhead. Of this amount, $820,000 is associated with the Large Case line, $1,276,800 is associated with the Medium Case line, and $1,261,000 is associated with the Small Case line. ClearCase Company is currently running a total of 33,000 machine hours: 10,000 in the Large Case line, 13,300 in the Medium Case line, and 9,700 in the Small Case line. ClearCase Company uses machine hours as the cost driver for manufacturing overhead costs.

a. Calculate the plant-wide manufacturing overhead rate.

b. Calculate the departmental overhead rate for each of the three departments listed.

c. Which product line(s) have been overcosted by using the plant-wide manufacturing overhead rate?

By how much per machine hour?

d. Which product line(s) have been undercosted by using the plant-wide manufacturing overhead rate?

By how much per machine hour?

Answer 1

Part a)

The plant-wide manufacturing overhead rate is calculated as below:

Plant-Wide Manufacturing Overhead Rate = Total Annual Manufacturing Overhead/Total Machine Hours

Using the values provided in the question in the above formula, we get,

Plant-Wide Manufacturing Overhead Rate = 3,357,800/33,000 = $101.75 per machine hour

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Part b)

The departmental overhead rate for each of the three departments is determined as follows:

	Departmental Manufacturing Overhead (A)	Machine Hours (B)	Departmental Manufacturing Overhead Rate (A/B)
Large Cases	820,000	10,000	$82 per machine hour
Medium Cases	1,276,800	13,300	$96 per machine hour
Small Cases	1,261,000	9,700	$130 per machine hour

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Part c)

Product line (s) Large Cases and Medium Cases have been overcosted by using the plant-wide manufacturing overhead rate.

Large Cases Product Line has been overcasted by $19.75 (101.75 - 82) per machine hour.

Medium Cases Product Line has been overcasted by $5.75 (101.75 - 96) per machine hour.

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Part d)

Product line Small Cases has been undercosted by using the plant-wide manufacturing overhead rate.

Small Cases Product Line has been undercasted by $28.25 (130 - 101.75) per machine hour.