Question

Donovan's Fine Furnishings manufactures upscale custom furniture. Donovan's currently uses a plantwide overhead rate based on direct labor hours to allocate its $1,290,000 of manufacturing overhead to individual jobs.​ However, Donna Cermak​, owner and​ CEO, is considering refining the​ company's costing system by using departmental overhead rates.​ Currently, the Machining Department incurs $870,000 of manufacturing overhead while the Finishing Department incurs $420,000 of manufacturing overhead. Donna has identified machine hours​ (MH) as the primary manufacturing overhead cost driver in the Machining Department and direct labor​ (DL) hours as the primary cost driver in the Finishing Department.

The Donovan's plant completed Jobs 450 and 455 on May 15. Both jobs incurred a total of 66 DL hours throughout the entire production process. Job 450 incurred 11 MH in the Machining Department and 55 DL hours in the Finishing Department​ (the other DL hour occurred in the Machining​Department). Job 455 incurred 44 MH in the Machining Department and 44 DL hours in the Finishing Department​ (the other two DL hours occurred in the Machining​ Department).

Requirement 1. Compute the plantwide overhead rate assuming that Donovan's expects to incur 30,000 total DL hours during the year. First identify the​ formula, then compute the rate. ​(Round your answer to the nearest whole​ dollar.)

/

=

Plantwide overhead rate

/

=

Requirement 2. Compute departmental overhead rates assuming that Donovan's

expects to incur 14,500 MH in the Machining Department and 17,500 DL hours in the Finishing Department during the year. First identify the​ formula, then compute the rate for each department. ​(Round your answers to the nearest whole​dollar.)

					Departmental
		/		=	overhead rate

Machining

/

=

per mach. hour

Finishing

/

=

per DL hour

Requirement 3. If Donovan's continues to use the plantwide overhead​ rate, how much manufacturing overhead would be allocated to Job 450 and Job​ 455? First identify the​ formula, then calculate the amount of manufacturing overhead that would be allocated to the jobs if the plantwide overhead rate is used. ​(Round your answers to the nearest whole​ dollar.)

					Manufacturing overhead
		x		=	allocated
Job 450		x		=
Job 455		x		=

Requirement 4. If Donovan's uses departmental overhead​ rates, how much manufacturing overhead would be allocated to Job 450 and Job​ 455? Use the following table to calculate the amount of manufacturing overhead that would be allocated to the jobs if the departmental overhead rates are used. ​(Round your answers to the nearest whole​ dollar.)

	Job 450	Job 455
Machining
Finishing
Total overhead allocation

Requirement 5. Based on your answers to Requirements 3 and​ 4, does the plantwide overhead rate overcost or undercost either​ job? Explain. If Donovan's sells its furniture at​ 125% of​ cost, will its choice of allocation systems affect product​ pricing? Explain.

The single plantwide rate (overcosts/undercosts) Job 450 by $ __ and (overcosts/undercosts) Job 455 by $ ___.

Since Donovan's sets its sales price at​ 125% of​ cost, and the job cost is (affected/unaffected) by th eallocation system it uses, it sales price will (be affected/will not be affected) by the allocation system it uses.

Answer 1

The calculation of the Requirement 4 is as follows :

1. Determination of Plant wide overhead rate based on Direct Labor Hours: Plantwide Overhead Rate Total Overhead Cost Total Direct Labor Hrs. Plantwide Overhead Rate $ 1,290,000 30,000 Labor Hrs. Plantwide Overhead Rate $43 2. Computation of Departmental Overheads: Formula Estimated Overheads / Estimated Base Overhead Departmental OH Rate No. of Hrs. Department Base Cost 870,000 Machine Hrs. 420,000 Labor Hrs. Machining Finishing 14,500 60.00 Per MH. 17,500 24.00 Per DLH 3. Determination of Manufacturing Overheads based on Plantwide Overhead Rate: Formula Direct Labor Hrs. Used * Overhead Rate per Direct Labor Hour Overhead Direct Job No. OH Rate Labor Hrs. Cost Job 450 43 66 2,838 Job 455 66 43 2,838 4. Determination of Manufacturing Cost Per Unit using Departmental OH Rates as calculated in 3 : Job 455 Particulars Job 450 Manufacturing Overheads - Machining Department - Finishing Department Total Manufacturing OH Cost 660 2,640 1,320 1,056 1,980 3,696 5. Comparison of the Cost under both methods: Dept. OH Plantwide Particulars Conclusion OH Rate Rate Job 450 Over cost 2,838 1,980 Job 455 2,838 3,696 Under cost