Question

Management Accounting I Case 2

With detail explanation, how to calculate all numbers

Brown Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on basis of direct labour cost. The following estimates were made at the beginning of the year:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct labour	$	316,500		$	211,000		$	422,000		$	949,500
Manufacturing overhead	$	569,700		$	844,000		$	105,500		$	1,519,200

Jobs require varying amounts of work in the three departments. The Home Stores job, for example, would have required manufacturing costs in the three departments as follows:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct material	$	20,800		$	2,000		$	7,800		$	30,600
Direct labour	$	12,000		$	3,900		$	19,600		$	35,500
Manufacturing overhead		?			?			?			?

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

Required:

1. Assuming the use of a plantwide overhead rate:

a. Compute the rate for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Home Stores job.

2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:

a. Compute the rate for each department for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Home Stores job.

3. Assume that it is customary in the industry to bid jobs at 140% of total manufacturing cost (direct materials, direct labour, and applied overhead).

a. What was the company’s bid price on the Home Stores job?

b. What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

4. At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct material	$	809,500		$	95,500		$	432,000		$	1,337,000
Direct labour	$	342,000		$	226,500		$	357,600		$	926,100
Manufacturing overhead	$	598,500		$	895,200		$	96,800		$	1,590,500

a. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used.

b. Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used.

Answer 1

1.

Plantwide overhead rate is one of the methods of assigning cost to various products or departments. Under this method, in total three steps will be followed, which are as follows:

• Combine all the estimated or budgeted overhead costs into one overhead cost pool
• Divide the cost pool by the choosen allocation base (which is direct labor cost in our case as mentioned in the question), to arrive at an allocation rate
• And, in the end, apply the above calculated allocation rate to assingn cost to each of the department or product.

a) Computation of the rate for the current year

Formula:

=Total Overhead Cost / Total direct labour cost

According to question,

Total budgeted overhead cost for the current year is equal to :

569,700 + 844,000 + 105,500

= 1519,200

And, total direct labour cost is:

316,500 + 211,000 + 422,000

= 949,500

Therefore, Allocation rate will come equals to :

1,519,200 / 949,500

= 1.6

b) Amount of manfacturing overhead cost that would have been applied to Home stores job:

For Cutting department = 12,000 * 1.6 = $19,200

For Maching department = 3,900 * 1.6 = $6,240

For Assembly department = 19,600 * 1.6 = $31,360

And, For total plant it will be:

35,500*1.6 = $ 56,800