Grange Company has two departments, Stamping and Assembly. The company uses a jo

Question

Grange Company has two departments, Stamping and Assembly. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Stamping Department bases its rate on machine-hours, and the Assembly Department bases its rate on direct labour cost. At the beginning of the year, the company made the following estimates:

  

  

Compute the predetermined overhead rate to be used in each department. (Round your stamping department answer to 2 decimal places.)

  

       

Assume that the overhead rates you computed in (1) above are in effect. The job cost sheet for Job 407, which was started and completed during the year, shows the following:

  

  

   Department    Stamping Assembly   Direct labour-hours 40,000    125,000   Machine-hours 300,000 15,000   Manufacturing overhead cost $ 2,550,000 $ 4,000,000   Direct labour cost $ 360,000 $ 3,200,000

Explanation / Answer

1) Predetermined overhead rate for Stamping department is based on Machine hours it is calculated as = Manufacturing Overheads cost / Machine hours in stamping department = 2550000/300000 = 8.50 per machine hour Predetermined overhead rate for Assembly department is based on direct labor costs it is calculated as = Manufacturing Overheads cost / direct labor cost in assembly department = 4000000 / 3200000 = 1.25 per $ of direct labor cost 2) Total overhead cost applied to job 407 can be computed for each department as Stamping department Machine hours used x recovery rate = 450 x 8.50 = 3825 Assembly department Direct labor cost x recovery rate = 800 x 1.25 = 1000 Total overhead applied to Job 407 = 3825 + 1000 = 4825

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