Question

Donovan's Fine Furnishings manufactures upscale custom furniture. Donovan's currently uses a plantwide overhead rate based on direct labor hours to allocate its $1,290,000 of manufacturing overhead to individual jobs.​ However, Donna Cermak​, owner and​CEO, is considering refining the​ company's costing system by using departmental overhead rates.​ Currently, the Machining Department incurs $870,000 of manufacturing overhead while the Finishing Department incurs $420,000 of manufacturing overhead. Donna 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.

The Donovan's plant completed Jobs 450 and 455 on May 15. Both jobs incurred a total of 66 DL hours throughout the entire production process. Job 450 incurred 11 MH in the Machining Department and 55 DL hours in the Finishing Department​ (the other DL hour occurred in the Machining​Department). Job 455 incurred 44 MH in the Machining Department and 44 DL hours in the Finishing Department​ (the other two DL hours occurred in the Machining​Department).
Requirement 1. Compute the plantwide overhead rate assuming that Donovan's expects to incur 30,000 total DL hours during the year. First identify the​ formula, then compute the rate. ​(Round your answer to the nearest whole​ dollar.)
/
=
Plantwide overhead rate
/
=
Requirement 2. Compute departmental overhead rates assuming that Donovan's
expects to incur 14,500 MH in the Machining Department and 17,500 DL hours in the Finishing Department during the year. First identify the​ formula, then compute the rate for each department.​(Round your answers to the nearest whole​dollar.)
Departmental
/
=
overhead rate
Machining
/
=
per mach. hour
Finishing
/
=
per DL hour
Requirement 3. If Donovan's continues to use the plantwide overhead​ rate, how much manufacturing overhead would be allocated to Job 450 and Job​ 455? First identify the​ formula, then calculate the amount of manufacturing overhead that would be allocated to the jobs if the plantwide overhead rate is used.​(Round your answers to the nearest whole​ dollar.)
Manufacturing overhead
x
=
allocated
Job 450
x
=
Job 455
x
=
Requirement 4. If Donovan's uses departmental overhead​ rates, how much manufacturing overhead would be allocated to Job 450 and Job​ 455? Use the following table to calculate the amount of manufacturing overhead that would be allocated to the jobs if the departmental overhead rates are used. ​(Round your answers to the nearest whole​ dollar.)
Job 450
Job 455
Machining
Finishing
Total overhead allocation
Requirement 5. Based on your answers to Requirements 3 and​ 4, does the plantwide overhead rate overcost or undercost either​ job? Explain. If Donovan's sells its furniture at​ 125% of​ cost, will its choice of allocation systems affect product​ pricing? Explain.
The single plantwide rate (overcosts/undercosts) Job 450 by $ __ and (overcosts/undercosts) Job 455 by $ ___.
Since Donovan's sets its sales price at​ 125% of​ cost, and the job cost is (affected/unaffected) by th eallocation system it uses, it sales price will (be affected/will not be affected) by the allocation system it uses.

Answer 1

Answer and Explanation:

1. The plant-wide overhead rate is:-

Plant-wide overhead rate = Total manufacturing overhead ÷ Cost allocation base

= $1,290,000 ÷ 30,000

= $43

2. The departmental overhead rates is

For machining = Total departmental overhead ÷ Cost allocation bases

= $870,000 ÷ 14,500

= $60

For finishing = Total departmental overhead ÷ Cost allocation bases

= $420,000 ÷ 17,500

= $24

3. The manufacturing overhead is

For Job 450 = Plantwide overhead rate × Actual use of allocation base

= $43 × 66

= $2,838

For Job 455 = Plantwide overhead rate × Actual use of allocation base

= $43 × 66

= $2,838

4. The amount of manufacturing overhead is

For Job 450 = Machining + Finishing

= (60 × 11) + (24 × 55)

= $660 + $1,320

= $1,980

For Job 455 = Machining + Finishing

= (60 × 44) + (24 × 44)

= $2,640 + $1,056

= $3,696

5. The single plant-wide rate overcost Job 450 by ($2,838 - $1,980) $858 and under-costs Job 455 by ($2,838 - $3,696) $858

Therefore the job cost is affected and sales price would be unaffected