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		6,800		89,000
Machine-hours		52,400		2,000
Total fixed manufacturing overhead cost	$	390,000	$	545,000
Variable manufacturing overhead per machine-hour	$	2.00		—
Variable manufacturing overhead per direct labor-hour		—	$	3.75

Required:

1. Compute the predetermined overhead rate for each department.

2. 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				13
Machine-hours			87				3
Direct materials		$	730			$	390
Direct labor cost		$	126			$	273

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

3. 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?

Required 1. Compute the predetermined overhead rate for each department. (Round your answers to 2 decimal places.)

	Department Cutting Finishing Predetermined overhead rate per MH per DLH

• Required 2

Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203. (Round your intermediate calculations to 2 decimal places and your final answer to the nearest dollar amount

	Total manufacturing cost

• Required 3

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? yes or no

Answer 1

Answer 1)

Computation of predetermined overhead rate for each department

Cutting Department: The Overhead allocation rate is based on machine –hours.

Predetermined overhead rate = (Total Fixed manufacturing overheads of cutting department/ Total machine hours in cutting department)

                                                 = $ 390,000/ 52,400 machine hours

                                                 = $ 7.44275 per machine hour or $ 7.44 per machine hour (rounded off)   

Finishing Department: The Overhead allocation rate is based on labour –hours.

Predetermined overhead rate = (Total Fixed manufacturing overheads of finishing department/ Total labour hours in finishing department)

                                                        = $ 545,000/ 89,000 labour hours

                                                         = $ 6.12359 per labour hour or $ 6.12 per labour hour (rounded off)   

Answer 2)

Calculation of Total Manufacturing cost of Job 203

Particulars	Department		Total
	Cutting	Finishing
Direct Materials	$ 730	$ 390	$ 1,120
Direct Labour Cost	$ 126	$ 273	$ 399
Manufacturing overheads:
Cutting Department (87 machine hours X $ 7.44 per machine hour)	$ 647.28		$ 647.28
Finishing Department (13 Labour hours X $ 6.12 per labour hour)		$ 79.56	$ 79.56
Total Manufacturing Cost			$2,245.84

Note:

• Manufacturing overheads of cutting department are allocated on the basis of 87 machine hours consumed in that department in completion of job.
• Manufacturing overheads of finishing department are allocated on the basis of 13 labour hours consumed in that department in completion of job.

Answer 3)

Yes, the overhead cost assigned to each job is expected to be substantially different in case a plantwide predetermined overhead rate based on direct labour hours is used.

Explanation: The cutting department is machine intensive and consumes more machine hours (i.e. 52,400 machine hours) and less labour hours (i.e. 6,800 labour hours). On the contrary, the finishing department is labour intensive and uses a high proportion of total labour hours of the organization and very less machine hours vis-a-vis cutting department.

If overheads are allocated on the basis of single predetermined rate labour hours, any job consuming fewer labour hours and higher machine hours (i.e. the machine intensive job) will have lower overheads allocation and accordingly its total manufacturing cost will be substantially lower.

On the contrary, if overheads are allocated using departmental overheads, the overheads will be allocated on the basis of activity consumed (i.e. machine hours and/or labour hours) and will be different from single plantwide rate based on machine hours.