Question

Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xania's plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

	Department A	Department B
Overhead costs (expected)	$750,000	$330,000
Normal activity (machine hours)	6,000	10,000

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours.

2. Compute predetermined overhead rates for each department using machine hours. (Note: Carry your calculations out to the nearest dollar.)

3. Job 73 used 25 machine hours from Department A and 50 machine hours from Department B. Job 74 used 40 machine hours from Department A and 15 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2.

Job 73 Plantwide	Job 73 Departmental
Job 74 Plantwide	Job 74 Departmental

4. Using a Plantwide, if actual machine hours for the year were 17,000 hours and actual overhead costs were $1,100,000, how much was overhead under- or over-applied for the year and how would that affect Cost of Goods Sold when it is closed to that account.

$$_________________________ over-applied/under-applied (circle one)

$$_________________________ Cost of Goods Sold increased/decreased (circle one)

Answer 1

1) predetermined overhead rate for the plant as a whole based on machine hours.
	= Total Overheads/ Total Machine Hours
	=($750000+330000)/(6000+10000)
	=$67.50 per machine hour
2) predetermined overhead rates for each department using machine hours
Department A= $750000/6000 =$125 per hour
Department B = $330000/10000 =$33 per hour
3)	a)overhead cost assigned to each job using the plantwide rate computed in Requirement 1.
		Job 73	Job 74
	Machine hours
	Department A	25	40
	Department B	50	15
A)	Total	75	55
B)	Overhead Rate Per hour	$        67.50	$        67.50
	Overhead Assigned (A*B)	$ 5,062.50	$ 3,712.50
b)computation using the departmental rates found in Requirement 2
		Job 73	Job 74
	Machine hours
1	Department A	25	40
2	Department B	50	15
	Overhead Rates Per Hour
3	Department A	$            125	$            125
4	Department B	$              33	$              33
	Overhead Assigned
5	Department A (1*3)	$        3,125	$        5,000
6	Department B (2*4)	$        1,650	$            495
7	Total	$        4,775	$        5,495
3)	Absorbed overhead = 17000 hours *$67.50 =$1147500
	Actual Overhead                                                      =$1100000
	Overapplied                                                               =$47500
	$47500 Cost of goods sold decreased.