Question

Plantwide Overhead Rate, Activity-Based Costing, Job Costs

Foto-Fast Copy Shop provides a variety of photocopying and printing services. On June 5, the owner invested in some computer-aided photography equipment that enables customers to reproduce a picture or illustration, input it digitally into the computer, enter text into the computer, and then print out a four-color professional quality brochure. Prior to the purchase of this equipment, Foto-Fast Copy Shop's overhead averaged $40,000 per year. After the installation of the new equipment, the total overhead increased to $112,000 per year. Foto-Fast Copy Shop has always costed jobs on the basis of actual materials and labor plus overhead assigned using a predetermined overhead rate based on direct labor hours. Budgeted direct labor hours for the year are 8,000, and the wage rate is $8 per hour.

Required:

1. What was the predetermined overhead rate prior to the purchase of the new equipment?
$ per direct labor hour

2. What was the predetermined overhead rate after the new equipment was purchased?
$ per direct labor hour

3. Suppose Rick Anselm brought in several items he wanted photocopied. The job required 600 sheets of paper at $0.02 each and 45 minutes of direct labor time. What would have been the cost of Rick's job on May 20? On June 20? If required, round your answers to the nearest cent.

	Total job cost
May 20	$
June 20	$

4. Suppose that the owner decides to calculate two overhead rates, one for the photocopying area based on direct labor hours as before, and one for the computer-aided printing area based on machine time. Estimated overhead applicable to the computer-aided printing area is $72,000, and forecasted usage of the machines is 2,000 hours. What are the two overhead rates? If required, round your answers to the nearest cent.

	Overhead Rate
Photo-copying	$	per direct labor hour
Computer-aided printing	$	per machine hour

Which overhead rate system is better—one rate or two?

Answer 1

• All working forms part of the answer
• Requirement 1

Total overhead prior to purchase	$40000
Total Budgeted direct labor hours	8000
Predetermined Overhead rate	$5 per DLHrs

• Requirement 2

Total overhead after purchase	$112000
Total Budgeted direct labor hours	8000
Predetermined Overhead rate	$14 per DLHrs

• Requirement 3

Working column		May-20	Jun-20
A	Total time	45 minutes	45 minutes
B=A/60	Total time in direct labor hours	0.75	0.75
C [given]	Wage rate per DLH	$8	$8
D=B x C	Labor cost	$6	$6
E=600 x 0.02	Cost of paper	$12	$12
F [calculated above]	Predetermined Overhead rate per DL hrs	$5	$14
G = F x B	Overhead allocated	$3.75	$10.5
H = D+E+G	Total Job Cost	$21.75	$28.5

• Requirement 4

Working

Total Overhead	$112000
(-) For computer aided printing	$72000
Photocopying	$40000

Answer

Computer aided printing overhead	$72000
Machine hours	2000
Overhead per machine hours	$36
Photocopying	$40000
Direct labor hours	8000
Overhead rate per DLHrs	$5

* The OVerhead rate system with TWO rates is BETTER. The single rate system is unscientific and abrupt. The two rate system has the characteristics of Activity Based Costing concept.