Each department will be able to allocate overhead based on the level of activity

Question

Each department will be able to allocate overhead based on the level of activity incurred by that department. The manager in the painting department is ecstatic about this change. In the past, the painting department has been allocated the most overhead. Best car, Inc uses the previous year's totals for current year estimation. In the previous year total direct labor hours was 10,000 and total manufacturing overhead was $4,609,000. The actual labor hours used by the painting department in the current years was 4,500 hours Required (Show your work): 6) Using traditional costing what is the predetermined rate per hour. 7) How much was applied to painting department? 8) Why was the manager of the painting department happier?

Explanation / Answer

6) The predetermined rate per hour = Total manufacturing overhead / Total direct labor hours = $4609000 / 10000 = $460.90 per DLH

7) The Overhead applied to the painting department in the current year = 4500 * $460.90 = $2,074,050

8) The manager of the painting department was happier because the operation/production in the current year was at the lower level and if the predetermined rate was not applied on the production, then the whole manufacturing overhead of $4609000 would be enforced on the production which will make the cost of production much high. The application of the predetermined overhead rate makes the production cost competitive enough.

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