White Company has two departments, Cutting and Finishing. The company uses a job

Question

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 8,000 62,000 Machine-hours 58,500 1,400 Total fixed manufacturing overhead cost $ 380,000 $ 435,000 Variable manufacturing overhead per machine-hour $ 3.00 — Variable manufacturing overhead per direct labor-hour — $ 3.75 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 5 19 Machine-hours 89 5 Direct materials $ 710 $ 360 Direct labor cost $ 100 $ 380 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?

Explanation / Answer

1. Fixed Overhead Absorbtion Rate:

A. Cutting Dept = Fixed Manf OH / Machine Hrs = $ 380,000 / 58500 Hrs = $ 6.5 per machine hour

B. Finishing Dept = Fixed Manf OH / Labor Hrs = $ 435,000 / 62000 Hrs = $ 7.02 per direct labour hr

2. Cost sheet of Job 203

3. Yes, there will be substantial difference in fixed OH cost if there is a change in parameters for absorbing Fixed OH

Particulars Cutting Finishing Total Direct Material 710 360 1070 Direct Labour 100 380 480 Variable OH - Based on Labour Hr 1946.25 (519*3.75) - Based on Machine Hr 26.85 (89.5* 3) Fixed OH - Cutting Dept 581.75 581.75 (89.5*6.5) - Finishing Dept 3643.38 3643.38 (519*7.02) Total Cost of Job 203 7748.23

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