Exercise 213 Departmental Predetermined Overhead Rates LO21

Exercise 2-13 Departmental Predetermined Overhead Rates [LO2-1, LO2-2, LO2-4] 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 Machine-hours Total fixed manufacturing overhead cost Variable manufacturing overhead per machine-hour Variable manufacturing overhead per direct labor-hour 73,000 1,100 360,000 438,000 7,800 58,200 $ 2.00 2.75 Required 1. Compute the predetermined overhead rate for each department. 2. The job cost sheet for Job 203, which was started and completed during the year, showed the following Department Cutting Finishing Direct labor-hours Machine-hours Direct materials Direct labor cost 19 82 $770 $ 54 $370 $ 342 Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203 3. 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?

Solution

1) Pre-determined rate :

Cutting Department = total overhead / total machine hours = 360000 / 58200 = $6.18 per MH

Finishing Department = 438000 / 73000 = $6 per DLH

2) Cost of Job 203 :

3) Plantwide pre-determined overhead rate based on DLHs = total overhead / total DLH = 798000/80800 = $9.87

No, it is not appropriate to use the plant-wide predetermined overhead rate based on DLH because there is a vast difference between the departmental overhead rate and Plantwide overhead rate. Under the Plantwide overhead rate, the overhead is under-charged to Cutting department and over-charged to the Finishing department because DLH of cutting department is much less than finishing department.

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	Cutting Deptt.	Finishing Deptt.	Total costs
DM	770	370	1140
DLC	54	342	396
V Manuf. O/h	82*2	19*2.75	216.25
Fixed Pre-deter O/H	82*6.18	19*6	620.76
Total costs of Job 203 =			$2373.01