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:

Department

Cutting Finishing

Direct labor-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 30,000

Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 5,000

Total fixed manufacturing overhead cost . . . . . . . . . . . . . . . . $264,000 $366,000

Variable manufacturing overhead per machine-hour . . . . . . . $2.00 —

Variable manufacturing overhead per direct labor-hour . . . . . — $4.00

The job cost sheet for Job 203, which was started and completed during the year, showed the following:

Department

Cutting Finishing

Direct labor-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 20

Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 4

Materials requisitioned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$500 $310

Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108 $360

1. Cutting Department:

The estimated total manufacturing overhead cost in the Cutting Department is computed as follows:

	Estimated fixed manufacturing overhead....................
	Estimated variable manufacturing overhead $2.00 per MH × 48,000 MHs...................................
	Estimated total manufacturing overhead cost.............

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a)..
Estimated total machine-hours (b).................
Predetermined overhead rate (a) ÷ (b)..........

     Finishing Department:

The estimated total manufacturing overhead cost in the Finishing Department is computed as follows:

	Estimated fixed manufacturing overhead....................
	Estimated variable manufacturing overhead $4.00 per DLH × 30,000 DLHs.................................
	Estimated total manufacturing overhead cost.............

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a)...
Estimated total direct labor-hours (b).............
Predetermined overhead rate (a) ÷ (b)...........

2.	Total manufacturing cost assigned to Job 203:
	Direct materials ($500 + $310)..........................
	Direct labor ($108 + $360)................................
	Cutting Department (80 MHs × $7.50 per MH)..
	Finishing Department (20 DLH × $16.20 per DLH)...............................................................
	Total manufacturing cost...................................

3. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overheard rate based on direct labor-hours, rather than using departmental rates? Explain. No computations are necessary.

Answer 1

1.

Cutting department

Estimated fixed manufacturing overhead	$264,000
Estimated variable manufacturing overhead (48,000*$2)	96,000
Total manufacturing overhead	$360,000
Estimated total manufacturing overhead	360,000
Estimated total machine hours	48,000
Predetermined overhead rate	$7.5

Finishing department

Estimated fixed manufacturing overhead	$366,000
Estimated variable manufacturing overhead (30,000*$4)	120,000
Total manufacturing overhead	$486,000
Estimated total manufacturing overhead	486,000
Estimated total direct labor hours	30,000
Predetermined overhead rate	$16.2

2.

Total manufacturing cost assigned to Job 203:
Direct materials ($500+310)	$810
Direct labor ($108+360)	468
Cutting Department (80*$7.5)	600
Finishing Department (20*$16.20)	324
Total manufacturing cost	$2,202

3.

Yes, Overhead cost should be assigned on the basis of departmental overhead rate as it is more accurate since each department uses different bases.