Isaacson's Fine Furnishings manufactures upscale custom furniture. Isaacson's currently uses a plantwide overhead rate based on direct labor hours to allocate its $1,170,000 of manufacturing overhead to individual jobs. However, Delores Johnson, owner and CEO, is considering refining the company's costing system by using departmental overhead rates. Currently, the Machining Department incurs $735,000 of manufacturing overhead while the Finishing Department incurs $435,000 of manufacturing overhead. Johnson 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. 1. Compute the plantwide overhead rate assuming that Isaacson's expects to incur 26,000 total DL hours during the year 2. Compute departmental overhead rates assuming that Isaacson's expects to incur 15,000 MH in the Machining Department and 17,400 DL hours in the Finishing Department during the year. 3. If Isaacson's continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Isaacson's Fine Furnishings manufactures upscale custom furniture. Isaacson's currently uses a plantwide
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1. |
Compute the plantwide overhead rate assuming that Isaacson's expects to incur 26,000 total DL hours during the year |
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2. |
Compute departmental overhead rates assuming that Isaacson's expects to incur 15,000 MH in the Machining Department and 17,400 DL hours in the Finishing Department during the year. |
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3. |
If Isaacson's continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455? |
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4. |
If Isaacson's uses departmental overhead rates, how much manufacturing overhead would be allocated to Job 450 and Job455? |
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5. |
Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either job? Explain. If Isaacson's sells its furniture at 125% of cost, will its choice of allocation systems affect product pricing? Explain. |
Overhead rate is the rate determined by dividing the total overheads by the total units of appropriate activity. This rate is determined to allocate the overheads to the cost of the product.
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