Chapter 15, Problem 47P

1.

To determine

Show the way in which SF Incorporation derived its plantwide predetermined overhead rate of $10 per direct labor hour.

Explanation of Solution

Show the way in which SF Incorporation derived its plantwide predetermined overhead rate of $10 per direct labor hour.

Particulars	Department I	Department II
Variable overhead
Department I:  $\left(37,500\times \$8\right)$	$300,000
Department II: $\left(37,500\times \$4\right)$		$150,000
Fixed overhead	$150,000	$150,000
Total overhead	$ 450,000	$300,000
Total budgeted overhead for both departments $\left(450,000+\$300,000\right)$		$750,000
Total expected direct-labor hours for both departments $\left(\$37,500+\$37,500\right)$		$75,000

Table (1)

Determine predetermined overhead rate.

$\begin{array}{c}\text{Predetermined overhead rate = }\frac{\text{Budgeted overhead}}{\text{Budgeted direct-labor hours}}\\ =\frac{\$750,000}{75,000}\\ =\$10\text{per direct-labor hour}\end{array}$

2.

To determine

Determine the price of each model stereo speaker, if the firm prices its product at its absorption manufacturing cost plus 15%.

Explanation of Solution

Determine the price of each model stereo speaker, if the firm prices its product at its absorption manufacturing cost plus 15%.

Particulars	Basic	Advanced
Total cost	$400	$500
Markup (15% of cost)
Basic: $\left(\$400\times 0.15\right)$	$60
Advanced: $\left(\$500\times 0.15\right)$		$75
Price	$460	$575

Table (2)

Therefore, the basic and advanced model stereo speaker price is $460 and $575 respectively.

3.

To determine

Determine the rates for Departments I and II for the coming year, if SF Incorporation uses departmental overhead rates.

Explanation of Solution

Determine the rates for Departments I and II for the coming year, if SF Incorporation uses departmental overhead rates.

Particulars	Department I	Department II
Budgeted overhead (A)	$450,000	$300,000
Budgeted direct-labor hours (B)	$37,500	$37,500
Predetermined overhead rate $\left(\frac{\text{A}}{\text{B}}\right)$	$12	$8

Table (3)

If SF Incorporation uses departmental overhead rates, then the predetermined overhead rate for Department I and Department II would be $12 and $8 respectively.

4.

To determine

Determine the absorption cost for each model stereo speaker using the departmental overhead rates.

Explanation of Solution

Determine the absorption cost for each model stereo speaker using the departmental overhead rates.

Particulars	Basic	Advanced
Direct material	$160	$260
Direct labor	$140	$140
Manufacturing overhead: Department I:
Basic: $\left(2\times \$12\right)$	$24
Advanced: $\left(8\times \$12\right)$		$96
Department II:
Basic: $\left(8\times \$8\right)$	$64
Advanced: $\left(2\times \$8\right)$		$16
Total absorption cost	$388	$512

Table (4)

Therefore, the absorption cost for basic and advanced model stereo speaker as per the departmental overhead rates are $388 and $512 respectively.

5.

To determine

Determine the new prices for each of the speaker model using the product costs determined in requirement (4), if management of the company is very particular with its policy of setting prices equal to the absorption cost plus 15%.

Explanation of Solution

Determine the new prices for each of the speaker model.

Particulars	Basic	Advanced
Total cost (requirement 4)	$388.00	$512.00
Markup (15% of cost)
Basic: $\left(\$388\times 15\%\right)$	$58.20
Advanced: $\left(\$512\times 15\%\right)$		$76.80
Price	$446.20	$588.80

Table (5)

Therefore, the new prices for basic and advanced model stereo speaker are $446.20 and $588.80 respectively.

6.

To determine

Suggest whether SF Incorporation should use plantwide or departmental overhead rates.

Explanation of Solution

SF Incorporation should use departmental overhead rates rather than plantwide overhead rates. The overhead cost structures in the two production departments are somewhat different, and departmental rates more accurately assign overhead costs to products. The basic model speakers were overcosted and the advanced model speakers were undercosted, if the company used a plantwide overhead rate. Impact of this is results in the basic model being overpriced and the Advanced model being underpriced.

The cost and price distortion resulted from the following facts:

(i) the advanced model speakers spend most of their production time in Department I, which is costlier than Department II, and

(ii) the basic model speakers spend most of their production time in Department II, which is the least costly of the two departments.