Question

When your products and/or services require the use of different resources in different departments, you have to use multiple POHRs...one for each department involved. Otherwise, a single, factory-wide POHR may not capture the correct information.

For example, when one product requires more machine time and less labor, and another product requires less machine time and more labor, you have to charge the overhead cost in each department (machining, and hand-assembly) using the appropriate cost driver (machine time or labor time, as the case is).

Let's try one exercise: A camera passes through three departments, P, Q, and R, to complete its production. Information related to the 100,000 units of a particular model C2100, produced annually, is shown below.

Actual Costs Direct materials $450,000

Direct labor (DLH: direct labor hours)

Department P (7,000 DLH × $21 per DLH) $147,000

Department Q (25,000 DLH × $19 per DLH) $475,000

Department R (10,000 DLH × $26 per DLH) $260,000

Machine Hours

Department P 42,000 MH

Department Q 23,000 MH

Department R 38,000MH

Total estimated overhead costs and related overhead data are shown below. Departments P and Q are more machine-intensive while Department R is more labor-intensive. Overhead cost in each department is allocated to production according to the more dominant resource being used in that department.

	Department P	Deparment Q	Department R
Total Direct labor hours	9000 DLH	7500 DLH	42000 DLH
Total Machine hours	67500 MH	135000 MH	5320 MH
Total Manufacturing overhead costs	$540,000	$675,000	$399,000

1. What is the overhead allocation rate for each department?

2. How much overhead cost will be allocated to the 100,000 units of C2100 in each department?

3. What is the overhead cost allocated to each unit of C2100 based on all of the above data?

4. What is the per unit product cost of C2100? 301 words

Answer 1

	Given that
	Direct materials		$450,000
			Direct labor			Machine hr
			HR	Rate	cost	HR
		P	7000	21	147000	42000
		Q	25000	19	475000	23000
		R	10000	26	260000	28000
					882000
			Department P	Deparment Q	Department R
	i	Total Direct labor hours	9000	7500	42000
	ii	Total Machine hours	67500	135000	5320
	iii	Total Manufacturing overhead costs	$540,000	$675,000	$399,000
	iv	Allocation driver	Machine hr	Machine hr	Labor Hr
	v	Allocation rate
		=total cost/Machine hr	$8.0	$5.0
		=total cost/labor hr			$9.50
	Answre 1
		Overhead allocation rate for each department
			Allocation rate/hr	Cost driver
		P	$8.0	Machine hr
		Q	$5.0	Machine hr
		R	$9.50	Labor hr
	Answre 2	Overhead cost allocated to the 100,000 units of C2100
		i	ii			iii	iv=iii*ii
		Department	HR required (Machine for P &Q, labor hr for R)			Rate	Overhead
		P	42000			$8.0	$336,000
		Q	23000			$5.0	$115,000
		R	10000			$9.50	$95,000
							$546,000
		Overhead cost of C2100 = 546,000
	Answre 3	Overhead cost per unit of C2100
		i	ii	iii=ii/100,000
		Department	Total overhead cost	Overhead cost per unit
		P	$336,000	$3.36
		Q	$115,000	$1.15
		R	$95,000	$0.95
			$546,000	$5.46
	Answre 4	Per unit product cost
	i	Direct materials		$450,000
	ii	Direct labor cost		882000
	iii	Allocated overhead		$546,000
	iv=i+ii+iii	Total cost		$1,878,000
	v	Number of unit		100000
	vi=iv/v	Per unit product cost		$18.78