Wilmington Company has two manufacturing departments--Assembly and Fabrication.

Question

Wilmington Company has two manufacturing departments--Assembly and Fabrication. It considers all of its manufacturing overhead costs to be fixed costs. The first set of data that is shown below is based on estimates from the beginning of the year. The second set of data relates to one particular job completed during the year--Job Bravo.

Required:

1. Assume Wilmington uses a plantwide predetermined overhead rate based on direct labor-hours. Calculate the predetermined overhead rate and the amount of manufacturing overhead applied to Job Bravo.

2. Assume Wilmington uses departmental predetermined overhead rates with direct labor-hours as the allocation base in Assembly and machine-hours as the allocation base in Fabrication. Calculate the predetermined overhead rate for each department and the manufacturing overhead applied to Job Bravo using departmental rates.

(Round your intermediate calculation to 2 decimal places.)

3. Do you recommend that Wilmington use a plantwide overhead rate or departmental overhead rates? Why?

Estimated Data Assembly Fabrication Total Manufacturing overhead costs $ 4,370,000 $ 4,830,000 $ 9,200,000 Direct labor-hours 115,000 69,000 184,000 Machine-hours 46,000 230,000 276,000

Explanation / Answer

All amounts are in $ 1-Plantwide predetremined overhead rate basd on direct labor hours Plant wide predetermined overhead rate refers to rate decided by taking an activity as base to apportion the fixed costs based on use of such activity by the departments of entity In this case direct labour hours is base for setting rate and it is as follows Predetermined rate= Budgeted Fixed cost/ Bedgeted direct labour hours=9200000/184000=50.00/Direct labour hours Job Bravo has used total 40 hours of direct labor hours ,accorindlgy amount of manufacturing overhead allocated as follows No.of direct labour hours used by Job Bravo * 50/Hour=40*50=2,000.00 2-Department wide predetremined overhead rate In this case each department uses their activity as basis to set departmental overhead rate as follows Assembly department= Manufacturing overhead of assembly department/Direct labour hours consumed by deparment                                                   43,70,000/115,000=38/ Direct labour hour Fabrication department= Manufacturing overhead of fabrication department/Direct labour hours consumed by deparment                                                 48,30,000/230,000=21/Machine Hour Job Bravo allocation as follows: Assembly ---- 40 Direct labor hours * 38/hour=735.00 Fabrication---35 Machine hours*21/hour         = 1,520.00 Total overhead allocated                                           2,255.00 3-Recommendation: Departmental wide overhead rates Use of departmental rates shows realstic approach and reasonable allocation as overhead rate directly associated with major activity of that department

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