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EXERCISE 2—13 Departmental Predetermined
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:
- Compute the predetermined overhead rate for each department.
- 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
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;
For finishing department;
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
For cutting department; As per formula it is clear that we need to know estimated total manufacturing overhead and estimated total machine hours.
Now let’s put values in the above given formula;
For finishing department; As per formula it is clear that we need to know estimated total manufacturing overhead and estimated total labor hours.
Now let’s put values in the above given formula;
Thus, above calculated is the predetermined overhead rate.
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;
Calculation:
As per information of the question direct materials, direct labor cost are given but we have to calculate manufacturing overhead applied.
Thus, above calculated is the total manufacturing cost assigned to job-203.
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.
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
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Assume that indirect labor is associated with the production departments, so that the total factory overhead is 5420,000 and 294,000 for the Subassembly and Final Assembly departments, respectively. 2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). 3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. 4. Determine the total and per-unit cost assigned to each product under activity-based costing. 5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.arrow_forwardActivity-based and department rate product costing and product cost distortions Black and Blue Sports Inc. manufactures two products: snowboards and skis. 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Assume that indirect labor is associated with the production departments, so that the total factory overhead is 315,000 and 540,000 for the Cutting and finishing departments, respectively. 2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). 3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. 4. Determine the total and per-unit cost assigned to each product under activity-based costing. 5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.arrow_forwardActivity-based and department rate product costing and product cost distortions Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows: Indirect labor 507,000 Cutting Department 156,000 Finishing Department 192,000 Total 855,000 The activity hase associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows: Activity Budgeted Activity Cost Activity Base Production control 237,000 Number of production runs Materials handling 270,000 Number of moves Total 507,000 The activity-base usage quantities and units produced for the two products follow: Number o Production Runs Number of Moves Direct Labor HoursCutting Direct Labor HoursFinishing Units Produced Snowboards 430 5,000 4,000 2,000 6,000 Skis _70 2,500 2,000 4,000 6,000 Total 500 7,500 6,000 6,000 12,000 Instructions 1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is 315,000 and 540,000 for the Cutting and finishing departments, respectively. 2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). 3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. 4. Determine the total and per-unit cost assigned to each product under activity-based costing. 5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.arrow_forward
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