Question

Southwick Products manufactures its products in two separate​ departments: Machining and Assembly. Total manufacturing overhead costs for the year are budgeted at $1,050,000. Of this​ amount, the Machining Department incurs $ 650,000 ​(primarily for machine operation and​ depreciation) while the Assembly Department incurs $400,000. The company estimates that it will incur 5,000 machine hours​ (all in the Machining​ Department) and 10,000 direct labor hours ​(2,000 in the Machining Department and 8,000 in the Assembly​ Department) during the year.

Southwick Products currently uses a plantwide overhead rate based on direct labor hours to allocate overhead.​ However, the company is considering refining its overhead allocation system by using departmental overhead rates. The Machining Department would allocate its overhead using machine hours​ (MH), but the Assembly Department would allocate its overhead using direct labor​ (DL) hours. The following chart shows the machine hours​ (MH) and direct labor​ (DL) hours incurred by Jobs 500 and 501 in each production​ department:


Machining Department Assembly Department

Job 500….10 MH 15 DL hours
2 DL hours

Job 501…..20 MH
2 DL hours 15 DL hours

Both Jobs 500 and 501 used $1 ,000 of direct materials. Wages and benefits total $30 per direct labor hour. Southwick Products prices its products at 120% of total manufacturing costs.

Requirement:
a. Compute the company's current plantwide overhead rate.
b. Compute refined departmental overhead rates.

Answer 1

a. 105

b. For machining $130

For assembly $50

Explanation:

a. The computation of the company's current plant-wide overhead rate is shown below:-

Current plant-wide overhead rate = Total manufacturing overhead ÷ Total direct labor hours

= $1,050,000 ÷ 10,000

= 105

b. The computation of refined departmental overhead rates is shown below:-

Departmental overhead cost = Overhead cost of department ÷ Cost driver of department

For machining

= $650,000 ÷ 5,000

= $130

For Assembly

= $400,000 ÷ 8,000

= $50