Question

Mr. Jones is considering using a job order cost system in two manufacturing departments. He would like the manufacturing overhead to be applied to jobs on the basis of direct labor cost in Department A and machine hours in Department B. In order to establishing the predetermined overhead rates for 2022, the following estimates were made for the year:

Department A B
Manufacturing overhead $2,100,000 $1,400,000
Direct labor cost 1,500,000 1,200,000
Direct labor hours 100,000 100,000
Machine hours 200,000 400,000
During January the following costs and production data :was collected.
Department A B
Direct materials used $195,000 $128,000
Direct labor cost 100,000 110,000
Manufacturing overhead incurred 130,000 135,000
Direct labor hours 8,000 8,400
Machine hours 16,000 34,000
Mr Jones wants you to:
(a) Compute the predetermined overhead rate for each department. 4 Marks
(b) Compute the total manufacturing cost assigned to jobs in January in each department.

Answer 1

(a) Predetermined overhead rate for each department is computed as follows;For Department A:Predetermined overhead rate = (Estimated manufacturing overhead for Department A) / (Estimated direct labor cost for Department A) = $2,100,000 / $1,500,000 = $1.4 per direct labor costFor Department B:Predetermined overhead rate = (Estimated manufacturing overhead for Department B) / (Estimated machine hours for Department B) = $1,400,000 / 400,000 = $3.5 per machine hours.(b) The total manufacturing cost assigned to jobs in January for each department is calculated below;For Department A:Direct materials used + Direct labor cost + Manufacturing overhead incurred = $195,000 + $100,000 + $130,000 = $425,000For Department B:Direct materials used + Direct labor cost + Manufacturing overhead incurred = $128,000 + $110,000 + $135,000 = $373,000.