When your products and/or services require the use of different resources in dif

Question

When your products and/or services require the use of different resources in different departments, you have to use multiple POHRs...one for each department involved. Otherwise, a single, factory-wide POHR may not capture the correct information.

For example, when one product requires more machine time and less labor, and another product requires less machine time and more labor, you have to charge the overhead cost in each department (machining, and hand-assembly) using the appropriate cost driver (machine time or labor time, as the case is).

Let's try one exercise: A camera passes through three departments, P, Q, and R, to complete its production. Information related to the 100,000 units of a particular model C2100, produced annually, is shown below.

Actual Costs Direct materials $450,000

Direct labor (DLH: direct labor hours)

Department P (7,000 DLH × $21 per DLH) $147,000

Department Q (25,000 DLH × $19 per DLH) $475,000

Department R (10,000 DLH × $26 per DLH) $260,000

Machine Hours

Department P 42,000 MH

Department Q 23,000 MH

Department R 38,000MH

Total estimated overhead costs and related overhead data are shown below. Departments P and Q are more machine-intensive while Department R is more labor-intensive. Overhead cost in each department is allocated to production according to the more dominant resource being used in that department.

1. What is the overhead allocation rate for each department?

2. How much overhead cost will be allocated to the 100,000 units of C2100 in each department?

3. What is the overhead cost allocated to each unit of C2100 based on all of the above data?

4. What is the per unit product cost of C2100? 301 words

Department P Deparment Q Department R Total Direct labor hours 9000 DLH 7500 DLH 42000 DLH Total Machine hours 67500 MH 135000 MH 5320 MH Total Manufacturing overhead costs $540,000 $675,000 $399,000

Explanation / Answer

Given that Direct materials $450,000 Direct labor Machine hr HR Rate cost HR P 7000 21 147000 42000 Q 25000 19 475000 23000 R 10000 26 260000 28000 882000 Department P Deparment Q Department R i Total Direct labor hours 9000 7500 42000 ii Total Machine hours 67500 135000 5320 iii Total Manufacturing overhead costs $540,000 $675,000 $399,000 iv Allocation driver Machine hr Machine hr Labor Hr v Allocation rate =total cost/Machine hr $8.0 $5.0 =total cost/labor hr $9.50 Answre 1 Overhead allocation rate for each department Allocation rate/hr Cost driver P $8.0 Machine hr Q $5.0 Machine hr R $9.50 Labor hr Answre 2 Overhead cost allocated to the 100,000 units of C2100 i ii iii iv=iii*ii Department HR required (Machine for P &Q, labor hr for R) Rate Overhead P 42000 $8.0 $336,000 Q 23000 $5.0 $115,000 R 10000 $9.50 $95,000 $546,000 Overhead cost of C2100 = 546,000 Answre 3 Overhead cost per unit of C2100 i ii iii=ii/100,000 Department Total overhead cost Overhead cost per unit P $336,000 $3.36 Q $115,000 $1.15 R $95,000 $0.95 $546,000 $5.46 Answre 4 Per unit product cost i Direct materials $450,000 ii Direct labor cost 882000 iii Allocated overhead $546,000 iv=i+ii+iii Total cost $1,878,000 v Number of unit 100000 vi=iv/v Per unit product cost $18.78

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