Chapter 3, Problem 20E

EXERCISE 2—13 Departmental Predetermined Overhead Rates LO2−1, LO2−2, LO2−4

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

Required:

1. Compute the predetermined overhead rate for each department.
2. 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
Direct materials	$500	$310
Direct labor cost	$108	$360

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Using the predetermined overhead rates that you computed in (1) above, compute the total manufacturing cost assigned to Job 203.

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

To determine

Predetermined overhead rate: Predetermined overhead rate refers to the rate of estimated manufacturing overhead which need to be followed by a firm.

Requirement - 1

The Predetermined overhead rate for each department.

Answer to Problem 20E

For cutting department;

  $\begin{array}{l}\text{Predetermined overhead rate}\text{for cutting department =}\frac{\text{\$360000}}{\text{48000}}\\ =\$7.50\text{ per machine hour }\end{array}$

For finishing department;

  $\begin{array}{l}\text{Predetermined overhead rate}\text{for finishing department =}\frac{\text{\$486000}}{\text{30000}}\\ =\$16.20\text{ per labor hour }\end{array}$

Explanation of Solution

• Given: Following information are available for this question;

Machine hours for cutting department = 48000

Direct labor hours for finishing department = 30000

Total fixed manufacturing overhead costs for cutting department = $264000

Total fixed manufacturing overhead costs for finishing department = $366000

Variable manufacturing overhead per machine hour = $2

Variable manufacturing overhead per direct labor hour = $4

Formula used:

  $\text{Predetermined overhead rate}\text{for cutting department =}\frac{\text{Estimated total manufacturing overhead}}{\text{Estimated total machine hours}}$

  $\text{Predetermined overhead rate}\text{for finishing department =}\frac{\text{Estimated total manufacturing overhead}}{\text{Estimated total labor hours}}$

Calculation:

For cutting department; As per formula it is clear that we need to know estimated total manufacturing overhead and estimated total machine hours.

  $\begin{array}{l}\text{Estimated total manufacturing overhead =}\hfill \\ \text{Fixed manufacturing overhead + Variable manufacturing overhead}\hfill \\ \text{Fixed manufacturing overhead=\$264000}\hfill \\ \text{Variable manufacturing overhead = 48000\&*\#x00A0;\$2 = \$96000}\hfill \\ \text{Thus, Estimated total manufacturing overhead = \$264000 + \$96000 = \$360000}\hfill \\ \text{Machine hours = 48000}\hfill \end{array}$

Now let’s put values in the above given formula;

  $\begin{array}{l}\text{Predetermined overhead rate}\text{for cutting department =}\frac{\text{\$360000}}{\text{48000}}\\ =\$7.50\text{ per machine hour }\end{array}$

For finishing department; As per formula it is clear that we need to know estimated total manufacturing overhead and estimated total labor hours.

  $\begin{array}{l}\text{Estimated total manufacturing overhead =}\hfill \\ \text{Fixed manufacturing overhead + Variable manufacturing overhead}\hfill \\ \text{Fixed manufacturing overhead=\$366000}\hfill \\ \text{Variable manufacturing overhead = 30000\&*\#x00A0;\$4 = \$120000}\hfill \\ \text{Thus, Estimated total manufacturing overhead = \$366000 + \$120000 = \$486000}\hfill \\ \text{Labor hours = 30000}\hfill \end{array}$

Now let’s put values in the above given formula;

  $\begin{array}{l}\text{Predetermined overhead rate}\text{for finishing department =}\frac{\text{\$486000}}{\text{30000}}\\ =\$16.20\text{ per labor hour }\end{array}$

Conclusion

Thus, above calculated is the predetermined overhead rate.

To determine

Requirement − 2

Total manufacturing cost: Total manufacturing cost refers to the overall costs of manufacturing a specific product.

To identify: Total manufacturing cost assigned to job-203.

Answer to Problem 20E

Solution:

Total manufacturing cost ($810 + $468 + $600 + $324) = $2202

Explanation of Solution

• Given: Following information are given in the formula;

Direct materials for cutting department = $500

Direct materials for finishing department = $310

Direct labor cost for cutting department = $108

Direct labor cost for finishing department = $360

• Formula used: Following formula will be used for calculating total manufacturing cost;

  $\begin{array}{l}\text{Total manufacturing cost = }\\ \left(\text{Direct materials + Direct labor cost + Manufacturing overhead applied}\right)\end{array}$

Calculation:

As per information of the question direct materials, direct labor cost are given but we have to calculate manufacturing overhead applied.

  $\begin{array}{l}\text{Direct materials }\left(\text{\$500 + \$310}\right)\text{ = \$810}\hfill \\ \text{Direct labor cost }\left(\text{\$108 + \$360}\right)\text{ = \$468}\hfill \\ \text{Manufacturing overhead applied to cutting department }\left(\text{80 \&*\#x00A0;\$7}\text{.50}\right)\text{ = \$600}\hfill \\ \text{Manufacturing overhead applied to finishing department }\left(\text{20 \&*\#x00A0;\$16}\text{.20}\right)\text{ = \$324}\hfill \\ \hfill \\ \text{Now let’s put the values in the above mentioned formula;}\hfill \\ \text{Total manufacturing cost }\left(\text{\$810 + \$468 + \$600 + \$324}\right)\text{ = \$2202}\hfill \end{array}$

Conclusion

Thus, above calculated is the total manufacturing cost assigned to job-203.

To determine

Requirement − 3

To Explain: Substantially different amount of overhead cost to be assigned to some jobs if the company used a plant wide overhead rate based on direct labor hours, rather than departmental rates.

Explanation of Solution

Yes, if White company use a plant wide rate based on direct labor cost then there will be a substantial different amount of overhead charged to manufactured units because normally it is seen that due to difference between machine hours and direct labor hours overhead cost also will be different.

Suppose if the jobs has longer machine hours and small amount of labor cost then there will be less overhead cost or vice versa.

Conclusion

Thus it is clear that there will be substantially different amount of overhead cost to be assigned to some jobs if the company used a plant wide overhead rate based on direct labor hours