Red River Products uses a normal cost, job order costing system. In the Mixing Department, overhead is applied using machine hours; in Paving, overhead is applied using direct labor hours. In December 2007, the company estimated the following data for its two departments for 2008: Mixing Department Paving Department Direct labor hours 6,000 14,000 Machine hours 30,000 6,000Budgeted overhead cost $240,000 $392,000 a. Compute the predetermined OH rate for each department of Red River.b. Job #220 was started and completed during March 2008. The job cost sheet shows the following information: Mixing Department Paving Department
Direct material $22,600 $3,400 Direct labor cost$ 1,250 $4,050 Direct labor hours24 120 Machine hours 160 44
Compute the overhead applied to Job $220 for each department and in total.c.If the company had computed a companywide predetermined OH rate rather than department rates, would such a rate have indicated the actual overhead cost of each job? Explain.
a. To compute the predetermined overhead rate for each department, we need to divide the budgeted overhead cost by the estimated allocation base for each department.
For the Mixing Department:
Predetermined Overhead Rate = Budgeted Overhead Cost / Machine Hours
= $240,000 / 30,000
= $8 per machine hour
For the Paving Department:
Predetermined Overhead Rate = Budgeted Overhead Cost / Direct Labor Hours
= $392,000 / 14,000
= $28 per direct labor hour
b. To compute the overhead applied to Job #220 for each department and in total, we need to multiply the predetermined overhead rate by the actual allocation base usage for each department.
For the Mixing Department:
Overhead Applied = Predetermined Overhead Rate * Machine Hours
= $8 per machine hour * 160 machine hours
= $1,280
For the Paving Department:
Overhead Applied = Predetermined Overhead Rate * Direct Labor Hours
= $28 per direct labor hour * 120 direct labor hours
= $3,360
In total:
Overhead Applied = Overhead Applied in Mixing Department + Overhead Applied in Paving Department
= $1,280 + $3,360
= $4,640
c. If the company had computed a companywide predetermined overhead rate rather than department rates, such a rate would not have indicated the actual overhead cost of each job. This is because different departments may have different cost drivers or allocation bases that drive their overhead costs. Using a single companywide predetermined overhead rate would not accurately allocate overhead costs to individual jobs in different departments.
To find the predetermined overhead rate for each department, you need to divide the estimated overhead cost by the estimated activity base for each department. In this case, the activity base for the Mixing Department is machine hours, and for the Paving Department, it is direct labor hours.
a. Predetermined OH rate for Mixing Department:
Predetermined OH rate = Budgeted overhead cost / Machine hours
Predetermined OH rate = $240,000 / 30,000 machine hours
Predetermined OH rate for Mixing Department = $8 per machine hour
Predetermined OH rate for Paving Department:
Predetermined OH rate = Budgeted overhead cost / Direct labor hours
Predetermined OH rate = $392,000 / 14,000 direct labor hours
Predetermined OH rate for Paving Department = $28 per direct labor hour
b. To calculate the overhead applied to Job #220 for each department, you need to multiply the predetermined OH rate by the actual activity for each department (direct labor hours and machine hours).
Overhead applied to Job #220 in Mixing Department:
Overhead applied = Predetermined OH rate * Actual machine hours
Overhead applied = $8 per machine hour * 160 machine hours
Overhead applied to Job #220 in Mixing Department = $1,280
Overhead applied to Job #220 in Paving Department:
Overhead applied = Predetermined OH rate * Actual direct labor hours
Overhead applied = $28 per direct labor hour * 120 direct labor hours
Overhead applied to Job #220 in Paving Department = $3,360
c. If the company had computed a companywide predetermined OH rate rather than department rates, it would not indicate the actual overhead cost of each job accurately. Using department rates allows for a more precise allocation of overhead costs based on the specific activity level of each department. Since the Mixing Department and Paving Department have different activity bases (machine hours and direct labor hours), a companywide OH rate would not accurately reflect the overhead costs incurred by each department.