Question

Jordan Company currently is using a plant-wide factory overhead rate based on machine hours. The budgeted factory overhead costs is $405,000. Company has two departments, X and Y. Company is considering use of departmental overhead rates for the allocation of each departments’ overhead costs to jobs. Overhead would be applied based on direct labor cost in Department X and machine-hours in Department Y. The following additional information is available:

Budgeted Amounts                           Department X           Department Y

Direct labor cost                                          $180,000                     $165,000

Factory overhead                                         $225,000                     $180,000

Machine-hours                                           51,000 mh                   40,000 mh

Actual data for Job #10                   Department X           Department Y

Direct materials requisitioned                        $10,000                      $16,000

Direct labor cost                                            $11,000                       $14,000

Machine-hours                                             5,000 mh                     3,000 mh

1. Compute total cost of manufacturing Job 10 under current system (using plant-wide rate).

2. Compute total cost of manufacturing Job 10 using departmental overhead rates.

Answer 1

1. TOTAL COST USING PLANT WIDE RATE.

WORKING NOTE 1 – CALCULATION OF PLANT WIDE RATE

TOTAL BUDGETED FACTORY OVERHEAD =225000+180000

                                                                            =405000

TOTAL BUDGETED MACHINE HOURS = 51000+40000

                                                                      =91000

PLANT WIDE RATE = 405000/91000

                                     =4.451 (ROUNDED OFF)

WORKING NOTE 2 – CALCULATION OF FACTORY OVERHEAD BASED ON ACTUAL DATA

	DEPARTMENT - X	DEPARTMENT - Y
MACHINE HOURS (ACTUAL)	5000	3000
PLANT WIDE RATE (WN -1)	4.451	4.451
FACTORY OVERHEAD	22255 (5000*4.451)	13353 (3000*4.451)

WORKING NOTE 3 – CALCULATION OF TOTAL COST

PERTICULARS	DEPARTMENT - X	DEPARTMENT - Y	TOTAL
DIRECT METERIAL	10000	16000	26000
DIRECT LABOUR COST	11000	14000	25000
FACTORY OVERHEAD(WN-2)	22255	13353	35608
TOTAL	43255	43353	86608

TOTAL COST OF MANUFACTURING JOB 10 UNDER PLANT WIDE RATE = $86608

1. TOTAL COST USING DEPARTMENTAL OVERHEAD RATE

WORKING NOTE 1 – CALCULATION OF DEPARTMENTAL OVERHEAD RATE

	DEPARTMENT - X	DEPARTMENT - Y
BUDGETED FACTORY OVERHEAD	225000	180000
BUDGETED DIRECT LABOUR COST	180000	-
BUDGETED MACHINE HOURS	-	40000
OVERHEAD RATE	1.25 (225000/180000)	4.5 (180000/40000)

WORKING NOTE 2 – CALCULATION OF FACTORY OVERHEAD BASED ON ACTUAL DATA

	DEPRTMNT - X	DEPRTMNT - Y
OVERHEAD RATE	1.25	4.5
DIRECT LABOUR COST (ACTUAL)	11000	-
MACHINE HOURS (ACTUAL)	-	3000
FACTORY OVERHEAD	13750 (1.25*11000)	13500 (4.5*3000)

WORKING NOTE 3 – CALCULATION OF TOTAL COST USING DEPARTMENTAL OVERHEAD RATE

PERTICULARS	DEPARTMENT - X	DEPARTMENT - Y	TOTAL
DIRECT METERIAL	10000	16000	26000
DIRECT LABOUR COST	11000	14000	25000
FACTORY OVERHEAD(WN-2)	13750	13500	27250
TOTAL	34750	43500	78250

TOTAL COST OF JOB 10 USING DEPARTMENTAL OVERHEAD RATE - $78250