Question
White Company has two departments, Cutting and Finishing. The company uses job-order costing 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 0
Variable manufacturing overhead per direct labor-hour 0 $ 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
Using the predetermined overhead rates you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.
Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?
Compute the predetermined overhead rate for each department.
Note: Round your answers to 2 decimal places.
Using the predetermined overhead rates you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.
Note: Round intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.
Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?
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 0
Variable manufacturing overhead per direct labor-hour 0 $ 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
Using the predetermined overhead rates you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.
Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?
Compute the predetermined overhead rate for each department.
Note: Round your answers to 2 decimal places.
Using the predetermined overhead rates you computed in requirement (1), compute the total manufacturing cost assigned to Job 203.
Note: Round intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.
Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?
Answers
GPT-4o mini
To compute the predetermined overhead rate for each department, we can use the following formula:
\[
\text{Predetermined Overhead Rate} = \frac{\text{Total Fixed Manufacturing Overhead Cost} + (\text{Variable Rate} \times \text{Estimated Activity Level})}{\text{Estimated Activity Level}}
\]
### Step 1: Compute the Predetermined Overhead Rate for Each Department
**Cutting Department:**
1. **Total Fixed Manufacturing Overhead Cost:** $264,000
2. **Variable Manufacturing Overhead per Machine-Hour:** $2.00
3. **Estimated Machine-Hours:** 48,000
Calculate the total variable overhead:
\[
\text{Total Variable Overhead} = \text{Variable Rate} \times \text{Estimated Machine-Hours} = 2.00 \times 48,000 = 96,000
\]
Now, calculate the total manufacturing overhead:
\[
\text{Total Overhead} = \text{Total Fixed} + \text{Total Variable} = 264,000 + 96,000 = 360,000
\]
Finally, compute the predetermined overhead rate:
\[
\text{Predetermined Overhead Rate (Cutting)} = \frac{360,000}{48,000} = 7.50
\]
**Finishing Department:**
1. **Total Fixed Manufacturing Overhead Cost:** $366,000
2. **Variable Manufacturing Overhead per Direct Labor-Hour:** $4.00
3. **Estimated Direct Labor-Hours:** 30,000
Calculate the total variable overhead:
\[
\text{Total Variable Overhead} = \text{Variable Rate} \times \text{Estimated Direct Labor-Hours} = 4.00 \times 30,000 = 120,000
\]
Now, calculate the total manufacturing overhead:
\[
\text{Total Overhead} = \text{Total Fixed} + \text{Total Variable} = 366,000 + 120,000 = 486,000
\]
Finally, compute the predetermined overhead rate:
\[
\text{Predetermined Overhead Rate (Finishing)} = \frac{486,000}{30,000} = 16.20
\]
### Summary of Predetermined Overhead Rates
- **Cutting Department:** $7.50 per machine-hour
- **Finishing Department:** $16.20 per direct labor-hour
### Step 2: Compute the Total Manufacturing Cost Assigned to Job 203
**From the job cost sheet:**
- **Cutting Department:**
- Direct Labor Hours: 6
- Machine Hours: 80
- Direct Materials: $500
- Direct Labor Cost: $108
**Overhead Applied (Cutting):**
\[
\text{Overhead Applied (Cutting)} = \text{Machine Hours} \times \text{Predetermined Overhead Rate (Cutting)} = 80 \times 7.50 = 600
\]
**Finishing Department:**
- **Direct Labor Hours: 20**
- **Direct Materials: $310**
- **Direct Labor Cost: $360**
**Overhead Applied (Finishing):**
\[
\text{Overhead Applied (Finishing)} = \text{Direct Labor Hours} \times \text{Predetermined Overhead Rate (Finishing)} = 20 \times 16.20 = 324
\]
#### Total Costs Assigned to Job 203
Now, we can calculate the total manufacturing cost assigned to Job 203 by summing up the costs from both departments:
1. **Cutting Costs:**
- Direct Materials: $500
- Direct Labor: $108
- Overhead Applied: $600
- Total Cutting Cost: $500 + $108 + $600 = $1,208
2. **Finishing Costs:**
- Direct Materials: $310
- Direct Labor: $360
- Overhead Applied: $324
- Total Finishing Cost: $310 + $360 + $324 = $994
**Total Manufacturing Cost for Job 203:**
\[
\text{Total Manufacturing Cost} = \text{Total Cutting Cost} + \text{Total Finishing Cost} = 1,208 + 994 = 2,202
\]
### Conclusion
- **Total Manufacturing Cost Assigned to Job 203:** $2,202
### Consideration about Plantwide Rate
If the company used a plantwide predetermined overhead rate based on direct labor-hours, there would likely be substantial differences in the overhead costs assigned to some jobs, particularly those that are machine-intensive (like in the Cutting Department) versus labor-intensive (like in the Finishing Department). The departmental rates take into account the specific activities and drivers in each department, while a plantwide rate could ignore significant variations in process and resource utilization, which would lead to less accurate cost assignment for jobs.
\[
\text{Predetermined Overhead Rate} = \frac{\text{Total Fixed Manufacturing Overhead Cost} + (\text{Variable Rate} \times \text{Estimated Activity Level})}{\text{Estimated Activity Level}}
\]
### Step 1: Compute the Predetermined Overhead Rate for Each Department
**Cutting Department:**
1. **Total Fixed Manufacturing Overhead Cost:** $264,000
2. **Variable Manufacturing Overhead per Machine-Hour:** $2.00
3. **Estimated Machine-Hours:** 48,000
Calculate the total variable overhead:
\[
\text{Total Variable Overhead} = \text{Variable Rate} \times \text{Estimated Machine-Hours} = 2.00 \times 48,000 = 96,000
\]
Now, calculate the total manufacturing overhead:
\[
\text{Total Overhead} = \text{Total Fixed} + \text{Total Variable} = 264,000 + 96,000 = 360,000
\]
Finally, compute the predetermined overhead rate:
\[
\text{Predetermined Overhead Rate (Cutting)} = \frac{360,000}{48,000} = 7.50
\]
**Finishing Department:**
1. **Total Fixed Manufacturing Overhead Cost:** $366,000
2. **Variable Manufacturing Overhead per Direct Labor-Hour:** $4.00
3. **Estimated Direct Labor-Hours:** 30,000
Calculate the total variable overhead:
\[
\text{Total Variable Overhead} = \text{Variable Rate} \times \text{Estimated Direct Labor-Hours} = 4.00 \times 30,000 = 120,000
\]
Now, calculate the total manufacturing overhead:
\[
\text{Total Overhead} = \text{Total Fixed} + \text{Total Variable} = 366,000 + 120,000 = 486,000
\]
Finally, compute the predetermined overhead rate:
\[
\text{Predetermined Overhead Rate (Finishing)} = \frac{486,000}{30,000} = 16.20
\]
### Summary of Predetermined Overhead Rates
- **Cutting Department:** $7.50 per machine-hour
- **Finishing Department:** $16.20 per direct labor-hour
### Step 2: Compute the Total Manufacturing Cost Assigned to Job 203
**From the job cost sheet:**
- **Cutting Department:**
- Direct Labor Hours: 6
- Machine Hours: 80
- Direct Materials: $500
- Direct Labor Cost: $108
**Overhead Applied (Cutting):**
\[
\text{Overhead Applied (Cutting)} = \text{Machine Hours} \times \text{Predetermined Overhead Rate (Cutting)} = 80 \times 7.50 = 600
\]
**Finishing Department:**
- **Direct Labor Hours: 20**
- **Direct Materials: $310**
- **Direct Labor Cost: $360**
**Overhead Applied (Finishing):**
\[
\text{Overhead Applied (Finishing)} = \text{Direct Labor Hours} \times \text{Predetermined Overhead Rate (Finishing)} = 20 \times 16.20 = 324
\]
#### Total Costs Assigned to Job 203
Now, we can calculate the total manufacturing cost assigned to Job 203 by summing up the costs from both departments:
1. **Cutting Costs:**
- Direct Materials: $500
- Direct Labor: $108
- Overhead Applied: $600
- Total Cutting Cost: $500 + $108 + $600 = $1,208
2. **Finishing Costs:**
- Direct Materials: $310
- Direct Labor: $360
- Overhead Applied: $324
- Total Finishing Cost: $310 + $360 + $324 = $994
**Total Manufacturing Cost for Job 203:**
\[
\text{Total Manufacturing Cost} = \text{Total Cutting Cost} + \text{Total Finishing Cost} = 1,208 + 994 = 2,202
\]
### Conclusion
- **Total Manufacturing Cost Assigned to Job 203:** $2,202
### Consideration about Plantwide Rate
If the company used a plantwide predetermined overhead rate based on direct labor-hours, there would likely be substantial differences in the overhead costs assigned to some jobs, particularly those that are machine-intensive (like in the Cutting Department) versus labor-intensive (like in the Finishing Department). The departmental rates take into account the specific activities and drivers in each department, while a plantwide rate could ignore significant variations in process and resource utilization, which would lead to less accurate cost assignment for jobs.