eahen Products manufactures its products in two separate departments: Machining
ID: 2514511 • Letter: E
Question
eahen Products manufactures its products in two separate departments: Machining and Assembly. Total manufacturing overhead costs for the year are budgeted at 1,050,000. Of this amount, the Machining Department incurs $650,000 (primarily for machine operation and depreciation) while the Assembly Department incurs 400,000. The company estimates that it will incur 5,000 machine hours (all in the Machining Department) and 10,000 direct labor hours (2,000 in the Machining 8,000 in the Assembly Teahen Products currently uses a plantwide overhead rate based on direct labor hours to allocate overhead. However, the company is considering refining its overhead allocation system by using departmental overhead rates. The Machining Department would allocate its overhead using machine hours (MH), but the Assembly Department would allocate its overhead using direct labor (DL) hours. The following chart shows the machine hours (MH) and direct labor (DL) hours incurred by Jobs 500 and 501 in each production departmentExplanation / Answer
Solution 1:
Plantwide overhead rate = Total estimated overhead / Estimated direct labor hours
= $1,050,000 / 10000 = $105 per hour
Solution 2:
Solution 3:
Job 500 and 501 both uses 10 direct labor hours in assembly department and 2 labor hours in machining department. However Job 500 uses 5 machine hours in machining department while Job 501 uses 10 machine hours in machining department.
Therefore Job 501 uses more of company resources.
Solution 4:
Total direct labor hours used by Job 500 and 501 = 2 + 10 = 12 direct labor hours
Allocated overhead to Job 500 and 501 using plant wide rate = 12* $105 = $1,260
Computation of departmental overhead rate Particulars Machining Assembly Overhead cost of deparment $650,000.00 $400,000.00 Allocation base MH DLH Total machine hours 5000 Total direct labor hours 8000 Overhead rate of department $130.00 $50.00Related Questions
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