Chapter 4, Problem 4.19AE

Compare traditional and departmental cost allocations (Learning Objective 1)

Sanderson’s Fine Furnishings manufactures upscale custom furniture. Sanderson’s currently uses a plantwide overhead rate based on direct labor hours to allocate its $1,000,000 of manufacturing overhead to individual jobs. However, Margaret Garmon, owner and CEO, is considering refining the company’s costing system by using departmental overhead rates. Currently, the Machining Department incurs $660,000 of manufacturing overhead, while the Finishing Department incurs $340,000 of manufacturing overhead. Garmon 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 Sanderson’s plant completed Jobs 450 and 455 on May 15. Both jobs incurred a total of 5 DL hours throughout the entire production process. Job 450 incurred 3 MH in the Machining Department and 4 DL hours in the Finishing Department (the other DL hour occurred in the Machining Department). Job 455 incurred 4 MH in the Machining Department and 3 DL hours in the Finishing Department (the other two DL hours occurred in the Machining Department).

Requirements

1. 1. Compute the plantwide overhead rate assuming that Sanderson’s expects to incur 20,000 total DL hours during the year.
2. 2. Compute departmental overhead rates assuming that Sanderson’s expects to incur 15,000 MH in the Machining Department and 17,000 DL hours in the Finishing Department during the year.
3. 3. If Sanderson’s continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455?
4. 4. If Sanderson’s uses departmental overhead rates, how much manufacturing overhead would be allocated to Job 450 and Job 455?
5. 5. Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either job? Explain. If Sanderson’s sells its furniture at 125% of cost, will its choice of allocation systems affect product pricing? Explain.