White Company has two departments Cutting and Finishing The

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 84,000 4,000 $ 370,000 $564,000 8,800 57,200 Direct labor-hours Machine-hours Total fixed manufacturing overhead cost Variable manufacturing overhead per machine-hour Variable manufacturing overhead per direct labor-hour $ 3.00 $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 14 82 $750 $126 $ 350 $ 294

Solution

3) Yes. If some jobs require a higher amount of machine time and a smaller amount of labor time, they will be
charged considerably less overhead cost if a plantwide rate is based on direct labor hours used. It seems that
it is applicable for Job 203 which required considerable machine time to complete, but required a relatively small amount of labor hours.

1)	Predetermined overhead rate = Fixed overhead per hour + Variable overhead per hour
		Cutting	Finishing
	Fixed manufacturing overhead (a)	$            370,000	$               564,000
	Machine hours/ Direct labour hours (b)	57,200	84,000
	Fixed MOH per MH/DLH C =a/b	$                   6.47	$                      6.71
	Variable overhead per MH/DLH (d)	$                   3.00	$                      2.75
	Predetermined overhead rate e = c+d	$                   9.47	$                      9.46
2)	Cost of Job 203	Cutting	Finishing	Total
	Direct Material	750	350	1100
	Direct Labor Cost	126	294	420
	MOH (as computed in 1 above)	$              776.42	$                 132.50	908.91958
		(82 MH*$9.47)	(14* DLH*$9.46)
	Total Manufacturing cost	$          1,652.42	$                 776.50	$ 2,428.92
	Total Manufacturing cost of Job 203 is $2428.92