3.22 Costs have been compiled for a certain manufacturing company for the most r

Question

3.22 Costs have been compiled for a certain manufacturing company for the most recent year. The summary is shown in the table below. Th plants, plus a corporate headquarters. Determine (a) the factory overhead rate for each plant and (b) the corporate overhead rate. The firm will use these rates in the following year e company operates two different manufacturing Plant 1 $1,000,000 S3.500,000 $1.300.000 ate head Plant 2 1,750,000 $4,000,000 $2.300,000 nse catego ers Direct labor Materials Factory expense Co ise $5.000,000 3.23 (A) The hourly rate for a certain work center is to be determined based on the following data: direct labor rate = $15.00 per hour. applicable factory overhead rate on labor-35%; capital investment in machine-$200.000: service life of the machine = 5 years: rate of return = 15%; salvage value in five years-zero: and applicable factory overhead rate on machine = 40%. The work center will be operated two 8-hour shifts, 250 days per year. (a) Determine the appropriate hourly rate for the work center. (b) If the workload for the cell can only justify a one shift operation, detemine the appropriate hourly rate for the work center

Explanation / Answer

Answer 3.22

Factory Overhead rate for each plant is determined by dividing annual factory expenses by direct labour costs.

For Plant A - factory overhead rate = 1300000/1000000 = 1.3 times or 130% of direct labour costs incurred

For Plant B - factory overhead rate = 2300000/1750000 = 1.3143 times or 131.43% of direct labour costs incurred

For Plant B - factory overhead rate = 5000000+2300000+1300000/(1000000+1750000) = 3.127 times or 312.73% of direct labour costs incurred for combined both plants

Answer 3.23

To determine hourly rate for a work centre, having two , 8 hours shift -

a) Direct Labour rate = $15 Per Hour

b) Factory Overhead Rate based on labour = 35% x 15 = $5.25 per Hour

c) Per hour Investment cost for machine = ( Initial Investment - Salvage Value ) / No. of operating hours over life time

(200000-0)/5/250/2/8 = $10 Per Hour

d) Rate of Return on machine anticipated = 15% x 10 = $1.5 per hour

e) Total hourly rate = 15+5.25+10+1.5 = $31.75 per hour

To determine hourly rate for a work centre, having one, 8 hours shift -

a) Direct Labour rate = $15 Per Hour

b) Factory Overhead Rate based on labour = 35% x 15 = $5.25 per Hour

c) Per hour Investment cost for machine = ( Initial Investment - Salvage Value ) / No. of operating hours over life time

(200000-0)/5/250/8 = $20 Per Hour

d) Rate of Return on machine anticipated = 15% x 20 = $3 per hour

e) Total hourly rate = 15+5.25+20+3 = $43.25 per hour

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