Question

Departmental Overhead Rates

Lansing, Inc., provided the following data for its two producing departments:

		Molding		Polishing		Total
Estimated overhead		$400,000		$80,000		$480,000
Direct labor hours (expected and actual):
Form A		1,000		5,000		6,000
Form B		4,000		15,000		19,000
Total		5,000		20,000		25,000
Machine hours:
Form A		3,600		3,000		6,600
Form B		1,400		2,000		3,400
Total		5,000		5,000		10,000

Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 25,000 units of Form A produced and sold and 50,000 of Form B.

Required:

1. Calculate the overhead rates for each department.

Molding	$ per machine hour
Polishing	$ per direct labor hour

2. Using departmental rates, assign overhead to the two products and calculate the overhead cost per unit. Round your answers to the nearest cent.

	Unit Overhead Cost
Assigned unit overhead cost for Form A	$ per unit
Assigned unit overhead cost for Form B	$ per unit

How does this compare with the plantwide rate unit cost, using direct labor hours?
Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.

3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates. Round your answers to the nearest cent.

	Unit Overhead Cost
Form A	$ per unit
Form B	$ per unit

Compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?

Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.

Feedback

1. For departmental rates, OH rates are assigned to each production department either per machine hrs. or direct labor hrs. Dept. estimated OH ÷ machine hour = rate per machine hour. Dept. estimated OH ÷ direct labor hour = rate per direct labor hour

2. Machine hours are used to assign OH of the Molding Dept. and direct labor hours are used to assign OH of the Polishing Dept. Total applied OH ÷ Units of production = Unit OH cost (each form). Plantwide rate = total estimated OH ÷ total direct hours

3. Use new numbers given and calculate OH the same as in Requirement 1 & 2, compare departmental to plantwide, and give conclusion of the results.

Answer 1

Solution 1:

Computation of Departmental Overhead Rates
Particulars	Molding	Polishing
Estimated Overhead	$400,000.00	$80,000.00
Estimated machine hour	5000
Estimated direct labor hour		20000
Allocation base	Machine hour	Direct labor hour
Overhead rate per machine hour/ direct labor hour	$80.00	$4.00

Solution 2:

Computation of overhead assigned and unit overhead cost
Particulars	Form A	Form B
Machine hours - Molding	3600	1400
Direct labor hours - Polishing	5000	15000
Overhead applied - Molding	$288,000.00	$112,000.00
Overhead applied - Polishing	$20,000.00	$60,000.00
Total overhead applied	$308,000.00	$172,000.00
Nos of units	25000	50000
Overhead cost per unit	$12.32	$3.44

Plantwide overhead rate = Estimated overhead / Estimated direct labor hours = $480,000/25000 = $19.20 per direct labor hour

Computation of overhead assigned and unit overhead cost
Particulars	Form A	Form B
Direct labor hours	6000	19000
Overhead applied	$115,200.00	$364,800.00
Nos of units	25000	50000
Overhead cost per unit	$4.61	$7.30

Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.

Solution 3:

Computation of overhead assigned and unit overhead cost
Particulars	Form A	Form B
Machine hours - Molding	1200	3800
Direct labor hours - Polishing	5000	15000
Overhead applied - Molding	$96,000.00	$304,000.00
Overhead applied - Polishing	$20,000.00	$60,000.00
Total overhead applied	$116,000.00	$364,000.00
Nos of units	25000	50000
Overhead cost per unit	$4.64	$7.28

Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.