In: Accounting
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 | 6,700 | 77,000 | ||
Machine-hours | 62,300 | 3,600 | ||
Total fixed manufacturing overhead cost | $ | 370,000 | $ | 464,000 |
Variable manufacturing overhead per machine-hour | $ | 3.00 | — | |
Variable manufacturing overhead per direct labor-hour | — | $ | 2.75 | |
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 | 5 | 13 | ||||||
Machine-hours | 89 | 6 | ||||||
Direct materials | $ | 740 | $ | 370 | ||||
Direct labor cost | $ | 110 | $ | 286 | ||||
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?
Solution 1:
Compuation of predetermined departmental overhead rates - White Company | ||
Particulars | Cutting | Finishing |
Estimated Variable overhead | $186,900.00 | $211,750.00 |
Estimated fixed overhead | $370,000.00 | $464,000.00 |
Estimated total manufacturing overhead | $556,900.00 | $675,750.00 |
Estimated machine hours | 62300 | |
Estimated direct labor hours | $77,000.00 | |
Predetermined overhead rate per machine hour / direct labor hour | $8.94 | $8.78 |
Solution 2:
Compuatation of manufacturing cost assigned to Job 203 - White Company | |
Particulars | Amount |
Direct materials | $1,110 |
Direct labor cost | $396 |
Manufacturing overhead - Cutting (89*$8.94) | $796 |
Manufacturing overhead - Finishing (13*$8.78) | $114 |
Total Manufacturing cost | $2,416 |
Solution 3:
Yes, we 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 because some jobs are labor intensive while some jobs are done using machines. Therefore assigned overhead will substantially differ.