Question

Red River Farm Machine makes a wide variety of products, all of which must be processed in the Cutting and Assembly departments. For the year, Red River budgeted total overhead of $1,986,000, of which $771,000 will be incurred in Cutting and the remainder will be incurred in Assembly. Budgeted direct labor and machine hours are as follows:

	Cutting	Assembly
Budgeted direct labor hours	27,000	3,000
Budgeted machine hours	2,100	65,800

Two products made by Red River are the RW22SKI and the SD45ROW. The following cost and production time information on these items has been gathered:

	RW22SKI	SD45ROW
Direct material	$34.85	$19.57
Direct labor rate in Cutting	$20.00	$20.00
Direct labor rate in Assembly	$8.00	$8.00
Direct labor hours in Cutting	6.00	4.80
Direct labor hours in Assembly	0.03	0.05
Machine hours in Cutting	0.06	0.15
Machine hours in Assembly	5.90	9.30

a. What is the plantwide predetermined OH rate based on (1) direct labor hours and (2) machine
hours for the upcoming year?
Note: Round your answers to two decimal places (i.e. round $4.3555 to $4.36).
(1) OH rate based on direct labor hours $Answer

per DLH
(2) OH rate based on machine hours $Answer

per MH

b. What are the departmental predetermined OH rates in Cutting and Assembly using the most appropriate base in each department?
Note: Round your answers to two decimal places (i.e. round $4.3555 to $4.36).
(1) OH rate in Cutting: $Answer

per DLH
(2) OH rate in Assembly: $Answer

per MH

c. What are the costs of products RW22SKI and SD45ROW using (1) a plantwide rate based on direct labor hours, (2) a plantwide rate based on machine hours, and (3) departmental rates calculated in (b)?
Note: Round your answers to two decimal places (i.e. round $4.3555 to $4.36).

	RW22SKI	SD45ROW
(1) Total cost using plantwide rate based on DLHs
(2) Total cost using plantwide rate based on MHs
(3) Total cost using rates in (b)

Answer 1

(a) Plantwide predetermined overhead rate:

(1) Based on direct labor hours

Calculation of total direct labor hours:

It is given that the budgeted direct labor hours in cutting are 27,000, and assembly is 3,000.

Now, calculate total direct labor hours as follows:

…… (1)

Direct labor hours in cutting Total direct labor hours +Direct labor hours in assembly = 27,000+3,000 = 30,000 hours

Predetermined overhead rate based on direct labor hours:

It is given that the budgeted total overhead is $1,986,000, and the calculated total direct labor hours are 30,000 hours (refer to Equation (1)).

Now, calculate predetermined overhead rate based on direct labor hours as follows:

Predetermined overhead rate = Budgeted total overhead

budgeted total direct labour hours

= $1,986,000

30,000

=$ 66.2 per direct labour hour .............(2)

Hence, the predetermined overhead rate is 66.2 per direct labor hour.

(2)

Based on hours:

Calculation of total budgeted machine hours:

It is given that the budgeted machine hours in cutting are 2,100, and assembly is 65,800.

Now, calculate total budgeted machine hours as follows:

Total budgeted machine hours = [budgeted machine hours in cutting + budgeted machine hours in assembly]

= 2,100 + 65,800

= 67,900 hours ........(3)

Predetermined overhead rate based on direct labor hours:

It is given that the budgeted total overhead is $1,986,000, and the calculated total machine hours are 67,900 hours (refer to Equation (1)).

Now, calculate predetermined overhead rate based on machine hours as follows:

Predetermined overhead rate = Budgeted total overhead

Budgeted total machine hours

= $1,986,000

67900

= $29.25 per machine hour ..............(4)

Hence, the predetermined overhead rate is $29.25 per machine hour.

(b)Predetermined overhead rates in cutting using direct labor hours as a base:

It is given that the budgeted overhead in cutting is $771,000, and the budgeted direct labor hours are 27,000.

Now, calculate predetermined overhead rates in cutting as follows:

Predetermined overhead rate in cutting=[ budgeted total overhead in cutting ]

budgeted total direct labour hours in cutting

= $ 771,000

27000

= $28.56 per direct labor hour.............(5)

Hence, the calculated predetermined overhead rate in cutting is $28.56 per direct labor hour.

Predetermined overhead rates in assembly using machine hours as a base:

It is given that the budgeted overhead in assembly is $1,215,000 , and the budgeted machine hours in assembly are 65,800.

Now, calculate predetermined overhead rates in assembly as follows:

Predetermined overhead rate in assembly=[budgeted total overhead in assembly ]

budgeted total direct labour hours in assembly

= $1,215,000

65800

=$18.47 per machine hour ..................(6)

Hence, the calculated predetermined overhead rate in assembly is $18.47 per machine hour.

(c)

RW22SKI:

Direct labor in cutting:

It is given that the direct labor rate in cutting is $20.00, and direct labor hours in cutting is 6.00 hours.

Now, calculate direct labor cost in cutting:

…… (7)

Direct labor cost in cutting Direct labor rate in cutting <Direct labor hours in cutting = $20.00x 6 hours = $120

Direct labor in assembly:

It is given that the direct labor rate in assembly is $8.00, and direct labor hour in assembly is 0.03 hours.

Now, calculate direct labor cost in assembly:

…… (8)

Direct labor rate in assembly Direct labor cost in assembly = <Direct labor hours in assembly = $8.00x0.03hours = $0.24

Total cost other than overhead on RW22SKI:

It is given that the direct material cost is $34.85, direct labor cost in cutting is $120 (refer to Equation (7)), and assembly is $0.24 (refer to Equation (8)).

Now, calculate the total cost other than overhead as follows:

…… (9)

Total cost other than overhead 1}-Com Direct material + Direct labor in cutting + Direct labor in assembly, = $34.85+$120+ $0.24 = $155.09

SD45ROW:

Direct labor in assembly:

It is given that the direct labor rate in assembly is $20.00, and direct labor hours in assembly are 4.80 hours.

Now, calculate direct labor cost in cutting:

…… (10)

Direct labor rate in asembly Direct labor cost in assembly = Direct labor hours in assembly = $20.00 x 4.80 hours = $96

Direct labor in assembly:

It is given that the direct labor rate in assembly is $8.00, and direct labor hour in assembly is 0.05 hours.

Now, calculate direct labor cost in assembly:

…… (11)

(Direct labor rate in assembly Direct labor cost in assembly = <Direct labor hours in assembly = $8.00 x 0.05hours = $0.40

Total cost other than overhead:

It is given that the direct material cost is $19.57, the calculated direct labor cost in cutting is $96 (refer to Equation (10)), and assembly is $0.40(refer to Equation (11)).

Now, calculate the total cost other than overhead as follows:

…… (12)

Total cost other than overhead Direct material + Direct labor in cutting + Direct labor in assembly = $19.57 +596 + $0.40 = $115.97

(1)

Plant wide rate based on direct labor hours:

Particulars	RW22SKI (Amount in $)	SD45ROW (Amount in $)
Total cost other than overhead	155.09(refer to Equation (9))	115.97(refer to Equation (12))
Overhead: [6.03*66.2] [4.85*66.2]	399.19	321.07
Total cost	514.28	437.04

Hence, the total cost of RW22SKI is 514.28, and SD45ROW is 437.04

Plant wide rate based on machine hours:

Particulars	RW22SKI (Amount in $)	SD45ROW (Amount in $)
Total cost other than overhead	155.09(refer to Equation (9))	115.97(refer to Equation (12))
Overhead: [5.96*29.25] [9.45*29.25]	174.33	276.41
Total cost	289.42	392.38

Hence, the total cost of RW22SKI is 289.42, and SD45ROW is 392.38.

(3)

Departmental rates calculated in (b):

Particulars	RW22SKI (Amount in $)	SD45ROW (Amount in $)
Total cost other than overhead	155.09(refer to Equation (9))	115.97(refer to Equation (12))
Cutting department overhead: [6*28.56] [4.8*28.56]	171.36	138.09
Assembly department overhead: [5.9*18.47 [9.3*18.47]	108.97	171.77
Total cost	435.42	425.83

Hence, the total cost of RW22SKI is 435.42, and SD45ROW is 425.83.

(d)

Impact of the different product costs:

• When the cost of products is determined based on direct labor hours, it will create loss per unit to the company.

• When the cost of products is determined based on machine hours, it will weaken the price of the competitors.

• Hence, the cost of products should be determined from departmental rates. It helps the management to meet the price of the competitors in the marketplace. Profit margin needs to be calculated before making a decision.