Question

C. Gugusan Bintang Sdn Bhd (GBSB) produces customized products and assigns manufacturing costs using normal costing system. From its inception, GBSB has been using plantwide overhead rate based on direct labour hours (DLH) to assign manufacturing overhead costs to customer orders. Recently, as the amount of its indirect costs getting larger, the accounting department of GBSB was considering two options – (1) to change the allocation base to machine hours; (2) to use departmental rate. If the latter is chosen, machining and assembly departments would use machine hours and direct labour hours respectively. The following details are collected from GBSB’s 2019 production budget: Machining Department Assembly Department Manufacturing overhead RM3,400,000 RM1,820,000 Direct labour costs RM1,800,000 RM1,500,000 Direct labour hours 120,000 240,000 Machine hours 200,000 61,000 At the end of 2019, the actual manufacturing overhead costs were RM3,510,000 in Machining Department and RM2,125,000 in Assembly Department. Machine hours used by Machining Department is 215,000 whereas Assembly Department used 63,500 machine hours. REQUIRED: (a) Calculate the plantwide pre-determined overhead rate using the following bases: (i) Direct labour hours (1 Mark) (ii) Machine hours (1 Mark) (b) Discuss which of the two bases calculated at (a) would be a better basis for plantwide overhead rate. (c) Determine the departmental overhead rate for each department. (d) Explain why departmental overhead rate would be a better option. (e) Explain TWO (2) ways how overapplied or underapplied overhead being disposed. BKAM2013 MANAGEMENT ACCOUNTING 1

Answer 1

All amounts are in RM

(a)

Plant wide predetermined overhead rate

i. On direct labour hours

Overhead rate = Totall manufacturing overhead/Total labour hours

= (3,400,000 + 1,820,000)/(120,000+240,000)

= 14.5 per labour hour

ii. On machine hours

Overhead rate = Total manufacturing overhead/Total machine hours

= (3,400,000 + 1,820,000)/(200,000+61,000)

= 20 per machine hour

b)

Of the two basis calculated in (a), the manufacturing overhead costs in Assembly department is less compared to Machining department. The direct labour hours of assembly department are higher in Assembly department compared to manufacturing department. The machining hours of assembly department are less compared to Machining department. There is direct relationship between the machine hours and manufacturing overhead cost betwen departments. So it is better to allocate based on the Machine hours rate. (In machining department, overhead costs are higher than assembly department but labour hours are less in machine department compared bro assembly department. So labour hours is not a correct basis)

c)

Departmental overhead rate

For Machining department = Total manufacturing overhead costs/Total machine hours

= 3,400,000/200,000

= 17 per machine hour

For assembly department = Total manufacturing costs/labour hours

= 1,820,000/240,000

= 7.583

d)

Departmental overhead is a better option because it gives the correct basis of overhead rates. The machining department mainly uses machine hours for its work and the assembly department is more a labour oriented so uses labour hours. This gives a better overhead rates for absorption and thus helps in correct allocation of overhead costs to products.

e)

Overapplied or underapplied overheads are treated in of the two ways

1. They take the entire overapplied or underapplied overheads to Cost of goods sold. Treating them as period costs

2. They allocate the overapplied or underapplied overheads to Work in progess, Finished goods, Cost of goods sold based on on units in WIP, Units in Finished goods inventory, Units sold. Here we are treating it as product cost.