Question

Wilmington Company has two manufacturing departments--Assembly and Fabrication. It considers all of its manufacturing overhead costs to be fixed costs. The first set of data that is shown below is based on estimates from the beginning of the year. The second set of data relates to one particular job completed during the year--Job Bravo.

Estimated Data	Assembly		Fabrication		Total
Manufacturing overhead costs	$	4,370,000	$	4,830,000	$	9,200,000
Direct labor-hours		115,000		69,000		184,000
Machine-hours		46,000		230,000		276,000

Job Bravo	Assembly	Fabrication	Total
Direct labor-hours	24	16	40
Machine-hours	16	19	35

Required:

1. Assume Wilmington uses a plantwide predetermined overhead rate based on direct labor-hours. Calculate the predetermined overhead rate and the amount of manufacturing overhead applied to Job Bravo.

2. Assume Wilmington uses departmental predetermined overhead rates with direct labor-hours as the allocation base in Assembly and machine-hours as the allocation base in Fabrication. Calculate the predetermined overhead rate for each department and the manufacturing overhead applied to Job Bravo using departmental rates.

(Round your intermediate calculation to 2 decimal places.)

3. Do you recommend that Wilmington use a plantwide overhead rate or departmental overhead rates? Why?

Answer 1

All amounts are in $

1-Plantwide predetremined overhead rate basd on direct labor hours

Plant wide predetermined overhead rate refers to rate decided by taking an activity as base to apportion

the fixed costs based on use of such activity by the departments of entity

In this case direct labour hours is base for setting rate and it is as follows

Predetermined rate= Budgeted Fixed cost/ Bedgeted direct labour hours=9200000/184000=50.00/Direct labour hours

Job Bravo has used total 40 hours of direct labor hours ,accorindlgy amount of manufacturing overhead allocated as follows

No.of direct labour hours used by Job Bravo * 50/Hour=40*50=2,000.00

2-Department wide predetremined overhead rate

In this case each department uses their activity as basis to set departmental overhead rate as follows

Assembly department= Manufacturing overhead of assembly department/Direct labour hours consumed by deparment

43,70,000/115,000=38/ Direct labour hour

Fabrication department= Manufacturing overhead of fabrication department/Direct labour hours consumed by deparment

48,30,000/230,000=21/Machine Hour

Job Bravo allocation as follows:

Assembly ---- 40 Direct labor hours * 38/hour=735.00

Fabrication---35 Machine hours*21/hour         = 1,520.00

Total overhead allocated                                           2,255.00

3-Recommendation: Departmental wide overhead rates

Use of departmental rates shows realstic approach and reasonable allocation as overhead rate directly associated with major activity of that department