Concept explainers
Compare traditional and departmental cost allocations (Learning Objective 1)
Albertson’s Fine Furnishings manufactures upscale custom furniture. Albertson’s currently uses a plantwide
Albertson’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 2 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 7 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. Compute the plantwide overhead rate, assuming Albertson’s expects to incur 27,500 total DL hours during the year.
- 2. Compute departmental overhead rates, assuming Albertson’s expects to incur 14,800 MH in the Machining Department and 18,000 DL hours in the Finishing Department during the year.
- 3. If the company continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455?
- 4. If the company uses departmental overhead rates, how much manufacturing overhead would be allocated to Job 450 and Job 455?
- 5. Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either of the jobs? Explain. If the company sells its furniture at 125% of cost, will its choice of allocation systems affect product pricing? Explain.
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