As a result of ABC, each department will be able to allocate overhead based on t

Question

As a result of ABC, 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 very happy 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):

1) Using traditional costing what is the predetermined rate per hour?

2) How much was applied to painting department?

3) Why was the manager of the painting department happier?

Explanation / Answer

1) Predetermind overhead rate per hour= total manufacturing expenses÷ total direct labour hour

4609000÷10000= 460.9$ per hour

2). Overhead applied to painting department

Labour hour in paintings department*predetermind overhead rate

4500*460.9= 2074050$

3). Manager was happy because he have to bear expenses only related with his department.it is said in past most expenses are allocated to painting department. It result poor performance in profits in his department. Now company use rational method of allocation of overhead. Now painting department has to allocate only expenses which is related to his department. It will show better pefoperform of his department .

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