Concept explainers
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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Chapter 3 Solutions
MANAGERIAL ACCOUNTING W/CONNECT
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- Financial & Managerial AccountingAccountingISBN:9781337119207Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning