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Overhead Applied to Jobs, Departmental Overhead Rates Xania Inc. uses a normal job-order costing system. Currently,...

Overhead Applied to Jobs, Departmental Overhead Rates

Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xania’s plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

Department A Department B

Overhead costs (expected) $85,000 $62,000

Normal activity (machine hours) 18,000 800

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. Round your answer to two decimal places.
$ per machine hour

2. Compute predetermined overhead rates for each department using machine hours. (Note: Round to two decimal places, if necessary.)

Department A $ per machine hour
Department B $ per machine hour

  1. 3. Conceptual Connection: Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Round final answers to the nearest cent, if necessary.

    Job 73 Job 74
    Plantwide $ $
    Departmental $ $

    Which of the two approaches gives the fairer assignment?
    Departmental rates

    4. Conceptual Connection: Repeat Requirement 3, assuming the expected overhead cost for Department B is $87,000 (not $62,000). Round overhead rates to the nearest cent.

    Job 73 Job 74
    Plantwide $ $
    Departmental $ $

    For this company, would you recommend departmental rates over a plantwide rate?

Business   Accounting   
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Homework Answers

Answer #1
1.Predetermined Plantwide rate = Total Overheads/Total machine hours
=147000/18800 = $7.82 per machine hour
2.Department A = 85000/18000 = $4.72 per machine hour
Department B = 62000/800 = $77.5 per machine hour
Job 73 Job 74
Plantwide      547.40      547.40
Departmental 3,969.40 1,786.00
Departmental Rates give higher assignment
4
Plantwide rate = (85000+87000)/18800 = $9.15 per hour
Department A = 4.72
Department B = 108.75 per hour
Job 73 Job 74
Plantwide      640.50      640.50
Departmental 5,531.90 2,411.00
Departmental rates are recommended
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