322 Costs have been compiled for a certain manufacturing com

3.22 Costs have been compiled for a certain manufacturing company for the most recent year. The summary is shown in the table below. Th plants, plus a corporate headquarters. Determine (a) the factory overhead rate for each plant and (b) the corporate overhead rate. The firm will use these rates in the following year e company operates two different manufacturing Plant 1 $1,000,000 S3.500,000 $1.300.000 ate head Plant 2 1,750,000 $4,000,000 $2.300,000 nse catego ers Direct labor Materials Factory expense Co ise $5.000,000 3.23 (A) The hourly rate for a certain work center is to be determined based on the following data: direct labor rate = $15.00 per hour. applicable factory overhead rate on labor-35%; capital investment in machine-$200.000: service life of the machine = 5 years: rate of return = 15%; salvage value in five years-zero: and applicable factory overhead rate on machine = 40%. The work center will be operated two 8-hour shifts, 250 days per year. (a) Determine the appropriate hourly rate for the work center. (b) If the workload for the cell can only justify a one shift operation, detemine the appropriate hourly rate for the work center

Solution

Answer 3.22

Factory Overhead rate for each plant is determined by dividing annual factory expenses by direct labour costs.

For Plant A - factory overhead rate = 1300000/1000000 = 1.3 times or 130% of direct labour costs incurred

For Plant B - factory overhead rate = 2300000/1750000 = 1.3143 times or 131.43% of direct labour costs incurred

For Plant B - factory overhead rate = 5000000+2300000+1300000/(1000000+1750000) = 3.127 times or 312.73% of direct labour costs incurred for combined both plants

Answer 3.23

To determine hourly rate for a work centre, having two , 8 hours shift -

a) Direct Labour rate = $15 Per Hour

b) Factory Overhead Rate based on labour = 35% x 15 = $5.25 per Hour

c) Per hour Investment cost for machine = ( Initial Investment - Salvage Value ) / No. of operating hours over life time

(200000-0)/5/250/2/8 = $10 Per Hour

d) Rate of Return on machine anticipated = 15% x 10 = $1.5 per hour

e) Total hourly rate = 15+5.25+10+1.5 = $31.75 per hour

To determine hourly rate for a work centre, having one, 8 hours shift -

a) Direct Labour rate = $15 Per Hour

b) Factory Overhead Rate based on labour = 35% x 15 = $5.25 per Hour

c) Per hour Investment cost for machine = ( Initial Investment - Salvage Value ) / No. of operating hours over life time

(200000-0)/5/250/8 = $20 Per Hour

d) Rate of Return on machine anticipated = 15% x 20 = $3 per hour

e) Total hourly rate = 15+5.25+20+3 = $43.25 per hour