Question

Departmental Overhead Rates

Mariposa, Inc., produces machine tools and currently uses a plantwide overhead rate, based on machine hours. Harry Whipple, the plant manager, has heard that departmental overhead rates can offer significantly better cost assignments than can a plantwide rate.

Mariposa has the following data for its two departments for the coming year:

	Department A	Department B
Overhead costs (expected)	$576,000	$144,000
Normal activity (machine hours)	120,000	60,000

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours.
$ per machine hour

2. Compute predetermined overhead rates for each department using machine hours. Round your answers to one decimal place.

Department A	$ per machine hour
Department B	$ per machine hour

3. Suppose that a machine tool (Product X75) used 50 machine hours from Department A and 170 machine hours from Department B. A second machine tool (Product Y15) used 170 machine hours from Department A and 50 machine hours from Department B. Compute the overhead cost assigned to each product using the plantwide rate computed in Requirement 1.

	Product X75	Product Y15
Plantwide:	$	$

Repeat the computation using the departmental rates found in Requirement 2.

	Product X75	Product Y15
Departmental:	$	$

Which of the two approaches gives the fairest assignment?

4. Repeat Requirement 3 assuming the expected overhead cost for Department B is $288,000.

	Product X75	Product Y15
Plantwide:	$	$
Departmental:	$	$

Would you recommend departmental rates over a plantwide rate?

Answer 1