Question

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		6,000		30,000
Machine-hours		48,000		5,000
Total fixed manufacturing overhead cost	$	264,000	$	366,000
Variable manufacturing overhead per machine-hour	$	2.00		—
Variable manufacturing overhead per direct labor-hour		—	$	4.00

  

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			6				20
Machine-hours			80				4
Direct materials		$	500			$	310
Direct labor cost		$	108			$	360

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?

Answer 1

1)	Predetermined overhead rate
	Cutting department
	Fixed manufacturing overhead			(264,000/48,000)=		5.5
	Variable manufacturing overhead per machiner hour					2
	Predetermined overhead rate					7.5	per machine hr
	finishing department
	Fixed manufacturing overhead			(366000/30,000)=		12.2
	Variable manufacturing overhead per machiner hour					4
	Predetermined overhead rate					16.2	per direct labor hr
2)	Total manufacturing cost
					Cutting	Finishing	total
	Direct materials				500	310	810
	direct labor				108	360	468
	overhead assigned
	cutting	(7.5*80)			600		600
	finishing	(16.2*20)				324	324
	total				1208	994	2202
3)	Yes, as we can see that cutting department uses less labor and hence the
	overhead assigned will be quite less