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Ex 3-20

The document discusses a company that uses job-order costing with departmental overhead rates. The Cutting Department uses a rate based on machine hours of $7.50 per hour, while the Finishing Department uses a rate of 180% of direct labor costs. For Job 203, which had 6 hours of direct labor and 80 machine hours in Cutting and 20 hours of direct labor and 4 machine hours in Finishing, the total overhead cost applied is calculated to be $870. Using a plantwide overhead rate based on direct labor costs could result in substantially different overhead costs assigned to some jobs.

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Dahra Sushmita Uy Limbo
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4K views7 pages

Ex 3-20

The document discusses a company that uses job-order costing with departmental overhead rates. The Cutting Department uses a rate based on machine hours of $7.50 per hour, while the Finishing Department uses a rate of 180% of direct labor costs. For Job 203, which had 6 hours of direct labor and 80 machine hours in Cutting and 20 hours of direct labor and 4 machine hours in Finishing, the total overhead cost applied is calculated to be $870. Using a plantwide overhead rate based on direct labor costs could result in substantially different overhead costs assigned to some jobs.

Uploaded by

Dahra Sushmita Uy Limbo
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Systems Design: Job-Order Costing

Dahra Sushmita Uy Limbo

Departmental Overhead Rates Ex. 3-20 [LO2, LO3, LO5]


White

Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rates in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor cost.

At

the beginning of the year, the company made the following estimates:
Department Cutting Finishing

Direct labor-hours Machine-hours Manufacturing overhead cost Direct labor cost

6,000 48,000 $360,000 $50,000

30,000 5,000 $486,000 $270,000

Predetermined overhead rate to be used in each department


Cutting

Department:

Predetermined overhead rate:

= =
Finishing

estimated total manufacturing overhead cost estimated total amount of allocation base $ 7.50 per machine hours

= 48,000 machine hours

$360,000

Department:

Predetermined overhead rate:

= 486,000 labor cost $270,000 direct

= =

estimated total manufacturing overhead cost estimated total amount of allocation base 1.8 or 180% of direct labor cost

Assume

that the overhead rates that you computed in (1) above are in effect. The job cost sheet for Job 203, which was started and completed during the year, showed the following:
Department Cutting Finishing

Direct labor-hours Machine-hours Manufacturing overhead cost Direct labor cost

6 80 $500 $70

20 4 $310 $150

Compute the total overhead cost applied to Job 203.

Total Overhead Cost Applied to Job 203

Cutting Department
(80 machine hours) ($7.50/machine hours)

= =

$600

Finishing Department
($150 direct labor cost) (180%)

$270

Total overhead cost applied ($600 + $270)

=
$870

Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide overhead rate based on direct labor cost, rather than using departmental rates? Explain. No computations are necessary.
Yes, if

they use a plantwide rate based on direct labor cost and if the jobs has longer machine hours and small amount of labor cost they will be charged less overhead cost.

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