Question

Farmer's Fine Furnishings manufactures upscale custom furniture. Farmer's currently uses a plantwide overhead rate based on direct labor hours to allocate its $1,100,000 of manufacturing overhead to individual jobs.​ However, Delores Fuller​, owner and​ CEO, is considering refining the​ company's costing system by using departmental overhead rates.​ Currently, the Machining Department incurs $740,000 of manufacturing overhead while the Finishing Department incurs $360,000 of manufacturing overhead. Fuller has identified machine hours​ (MH) as the primary manufacturing overhead cost driver in the Machining Department and direct labor​ (DL) hours as the primary cost driver in the Finishing Department.

Requirement 1. Compute the plantwide overhead rate assuming that Donovan's expects to incur 27,500 total DL hours during the year.
First, identify the formula, then compute the rate.
Requirement 2. Compute departmental overhead rates assuming that Donovan's expects to incur 14,800 MH in the Machining Department and 18,000 DL hours in the Finishing Department during the year.
First, identify the formula, then compute the rate for each department.

Answer 1

See below

Step-by-step explanation:

1. Plant wide overhead rate

= Total manufacturing overhead / Estimated cost allocation base

= $1,100,000/27,500

= $40

2. Compute department overhead rates

= Total department overhead / Estimated cost allocation base

Machining department

= $740,000/14,800

= $50 per MH

Fishing department

= $360,000/18,000

= $20 per DL