Question

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		8,100		74,000
Machine-hours		53,600		1,700
Total fixed manufacturing overhead cost	$	380,000	$	471,000
Variable manufacturing overhead per machine-hour	$	3.00		—
Variable manufacturing overhead per direct labor-hour		—	$	3.75

Required:

A. Compute the predetermined overhead rate for each department.

B. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

	Department
	Cutting				Finishing
Direct labor-hours			6				14
Machine-hours			86				3
Direct materials		$	700			$	360
Direct labor cost		$	126			$	294

Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.

C. 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

Solution A:

Compuation of predetermined departmental overhead rates - White Company
Particulars	Cutting	Finishing
Estimated Variable overhead	$160,800.00	$277,500.00
Estimated fixed overhead	$380,000.00	$471,000.00
Estimated total manufacturing overhead	$540,800.00	$748,500.00
Estimated machine hours	53600
Estimated direct labor hours		$74,000.00
Predetermined overhead rate per machine hour / direct labor hour	$10.09	$10.11

Solution B:

Compuatation of manufacturing cost assigned to Job 203 - White Company
Particulars	Amount
Direct materials	$1,060
Direct labor cost	$420
Manufacturing overhead - Cutting (86*$10.09)	$868
Manufacturing overhead - Finishing (14*$10.11)	$142
Total Manufacturing cost	$2,489

Solution C:

Yes, overhead cost assigne to some jobs differ substantially if company used a plantwide predetermined overhead rate based on direct labor hours rather than using departmental rates. In this situation, jobs that consume substantial machine hours will be assigned very less overhead.