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 Direct labor-hours Machine-hours Total fixed manufacturing overhead cost Variable manufacturing overhead per machine-hour Variable manufacturing overhead per direct labor-hour Department Cutting Pinishing 8,400 80,000 60,600 1,200 $ 380,000 $ 444,000 $ 2.00 3.75 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 3 17 Direct labor-hours Machine-hours Direct materials Direct labor cost $ 760 $ 66 S 350 $374 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 laborehours rather than sinn donartmental mor?

Answer 1

1. predetermined overhead rates:

for cutting department;

total overhead / basis

here,

total overhead = fixed overhead + variable portion

=>380,000+2*(60,600 machine hours)

=>380,000 + 121,200

=>$501,200.

predetermined rate = $501,200 /60,600 machine hours

=>$8.27 per machine hour.

for finishing department:

total overhead = 444,000 +($3.75 * 80,000 labor hours)

=>$744,000

predetermined rate = $744,000 / 80,000 direct labor hours

=>$9.3 per direct labor hour.

required 2:

	cutting	finishing	total
direct materials	760	350	$1,110
direct labor	66	374	440
overhead ($8.27*87) (9.3*17)	719.49	158.10	877.59
total cost			$2,427.59

required 3:

Yes.

There will be a substantial change in the predetermined overhead rate if a plant wide rate based on direct labor hours is used.

This is because the estimate of total overhead will change and also the denominator basis for calculation of predetermined rate.