Question

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

Cutting Finishing
Direct labor-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 30,000
Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 5,000
Total fixed manufacturing overhead cost . . . . . . . . . . . . . . . . $264,000 $366,000
Variable manufacturing overhead per machine-hour . . . . . . ....$2.00 ______
Variable manufacturing overhead per direct labor-hour . . . . . _____ $4.00

Required:
Compute the predetermined overhead rate to be used in each department.

Answer 1

Answer and Explanation:

The computation of the predetermined overhead rate is shown below:

For Cutting department

= Variable manufacturing overhead per machine hour + (Total fixed manufacturing overhead ÷ machine hours)

= $2 + ($264,000 ÷ 48,000)

= $2 + $5.50

= $7.50

For finishing department

= Variable manufacturing overhead per direct labour + (Total fixed manufacturing overhead ÷ direct labor hours)

= $4 + ($366,000 ÷ 30,000)

= $4 + $12.20

= $16.20