Wood Products has two production departments: cutting and assembly. The company

Question

Wood Products has two production departments: cutting and assembly. The company has been using a plantwide cost driver rate computed by dividing plantwide overhead costs by total plantwide direct labor hours. The estimates for overhead costs and practical capacity quantities of cost drivers for the current year follow: LOADING...(Click the icon to view the data.) Requirements (a) Compute the plantwide cost driver rate. (b) Determine departmental cost driver rates based on direct labor hours for assembly and machine hours for cutting. (c) Provide reasons why EasternEastern Wood might use the method in part a or the one in part b.

Cutting Assembly Total Manufacturing overhead Direct labor hours Machine hours 25,000 S 1,000 4,000 35,000 S 3,000 2,000 60,000 4,000 6,000 S

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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