In: Accounting
John Company of Akron, Ohio has two manufacturing departments—Machining and Assembly. The company considers all of its manufacturing overhead costs to be fixed costs. It provided the following estimates at the beginning of the year as well as the following information with respect to Jobs A and B:
Estimated Data |
Machining |
Assembly |
Total |
Manufacturing overhead |
$500,000 |
$100,000 |
$600,000 |
Direct labor-hours |
10,000 |
50,000 |
60,000 |
Machine-hours |
50,000 |
5,000 |
55,000 |
Job A |
Machining |
Assembly |
Total |
Direct labor-hours |
5 |
10 |
15 |
Machine-hours |
11 |
2 |
13 |
Job B |
Machining |
Assembly |
Total |
Direct labor-hours |
4 |
5 |
9 |
Machine-hours |
12 |
3 |
15 |
Required
Solution A:
Pre determined overhead rate = Estimated manufacturing overhead /Estimated direct labor hours
= $600,000 / 60000 = $10 per direct labor hour
Manufacturing overhead cost applied to Job A = 15*$10 = $150
Manufacturing overhead cost applied to Job A = 9*$10 = $90
Solution B:
Computation of Departmental Overhead rates | ||
Particulars | Machining | Assembly |
Overhead Cost (Expected) | $500,000.00 | $100,000.00 |
Allocation Base | Machine hours | Direct labor hours |
Quantity of Allocation Base | $50,000.00 | $50,000.00 |
Overhead rate | $10.00 | $2.00 |
Computation of Overhead cost applied to Job | ||
Particulars | Job A | Job B |
Overhead applied - Machining | $110.00 | $120.00 |
Overhead applied - Assembly | $20.00 | $10.00 |
Total Overhead Applied | $130.00 | $130.00 |
Solution 3:
If John Company multiplies its job costs by a markup percentage to establish selling prices, then plantwide overhead rate adversely affect the company’s pricing decision as Job A will be overprice and Job B will be underpriced due to improper allocation.