Cornerstone Exercise 4.3 Departmental Overhead Rates Lansing, Inc., provided the

Question

Cornerstone Exercise 4.3 Departmental Overhead Rates Lansing, Inc., provided the following data for its two producing departments: OBJECTIVE CORNERSTONE 4.3 Molding Polishing Total Estimated overhead Direct labor hours (expected and $400,000 $80,000 $480,000 actual) Form A Form B 1,000 4,000 5,000 5,000 15,000 20,000 6,000 19,000 25,000 Total Machine hours Form A Form B 3,500 1,500 5,000 3,000 2,000 5,000 6,500 3,500 10,000 Total Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 30,000 units of Form A produced and sold and 50,000 of Form B Required: 1. Calculate the overhead rates for each department. 2. Using departmental rates, assign overhead to the two products and calculate the overhead cost per unit. How does this compare with the plantwide rate unit cost, using direct labor hours? What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the over- head cost per unit for each product using departmental rates, and compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome? 3.

Explanation / Answer

1) Molding: $4,00,000/5000 = $80 per machine hour.

Polishing : $80,000/20,000 =$4 per direct labour.

2)

Plantwide rate= 480,000/25000= $19.2 per direct labout hour.

Form A unit overhead cost : $19.2 × 6000/30,000 = $3.84

Form B unit overhead cost : $19.2 × 19000/50,000 =$7.30 (rounded)

Relative to plantwide rate, the cost increased dramatically for form A (from $3.84 to $10) and decrease significantly for from B(from $7.3 to $3.6)

3)

Compared to the plantwide unit overhead cost, the cost is $0.03 more for form A and $0.02 less for form B. The message is that departmental rates may not necessarily cause a significant change in the assignment. It depend on the complexity of each product and how the resource demands are made in each department.

Form A Form B ($80 × 3500) + ($4 × 5000) $3,00,000 ($80 × 1500) + ($4 × 15000) $180,000 Total applied overhead $3,00,000 $180,000 Unit of production ÷ 30,000 ÷ 50,000 Unit overhead cost $10 $3.6

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