Western Wood Products has two production departments: cuttingand assembly. The c

Question

Western Wood Products has two production departments: cuttingand assembly. The company has been using a single predeterminedcost driver rate based on plantwide direct labor hours. That is,the plantwide cost driver rate is computed by dividing plantwidesupport costs by total plantwide direct labor hours. The estimatesfor support costs and quantities of cost drivers for 2006follow:

______________________    Cutting______Assebmly_____________Total____________

Manufacturingsupport               $25,000           $35,000                            $60,000

Direct labor hours                          1,000                3,000                                4,000

Machinehours                               4,000                2,000                                 6,000

a.       What was the singleplantwide cost driver rate for 2006?

b.      Determine departmental costdriver rates based on direct labor hours for assembly and machinehours for cutting.

Explanation / Answer

a. What was the single plantwide cost driver rate for2006?
                    Plantwide Cost driverrate    =   Total ManufacturingSupport Cost / Plantwide direct labor hour                                                          =   60,000/ 4,000                                                          =   15per direct labor hour b. Determine departmental cost driver rates based ondirect labor hours for assembly and machine hours for cutting.
    Cutting dept. Cost driver rate =   Manufacturing Support Cost in Cutting dept. /Machine hours in                                                   Cutting dept.                                                               =   25,000   /   4,000                                                                  =   6.25per Machine Hour Assembly department Cost driverrate   =   Manufacturing Support Costin Assembly department /                                                                   DLHin Assembly dept.                                                             =   35,000   /   3,000                                                                 =   11.67per DLH c. Provide reasons why Western Wood night use the methodin (a) or (b).
             Western Wood Productsshould use Plantwide cost driver rate instead of singlepredetermined        cost driver ratebased on plantwide direct labor due to the following reasons:
      1)   Plantwidecost comparison can be made separately for cutting plant andassembly plant       2)   Identifythe cost that can be eliminated or reduced in department havingscope for.       3)   Toeliminate chances of poor performance in any department to be setoff against better             performancein mate department.       

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