Question

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

1. If John Company uses a plantwide predetermined overhead rate with direct labor-hours as the allocation base, how much manufacturing overhead cost would be applied to Job A? Job B? Show your work.

2. Assume that John Company uses departmental predetermined overhead rates. The Machining Department is allocated based on machine-hours and the Assembly Department is allocated based on direct labor-hour. How much manufacturing overhead cost would be applied to Job A? Job B? Show your work.

3. If John Company multiplies its job costs by a markup percentage to establish selling prices, how might plantwide allocation adversely affect the company’s pricing decision?

Answer 1

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.