Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 55

Plantwide vs. Departmental Overhead Rate

Adams Corporation manufactures auto steering systems. Cost estimates for one unit of the product for the year 2010 follow:

Direct materials	$200
Direct labor ($12/hour)	240
Machine-hours	20

This product requires 12 hours of direct labor in department A and 8 hours in department B. Also, it requires 5 machine-hours in department A and 15 machine-hours in department B. The factory overhead costs estimated in these two departments follow:

	A	B
Variable cost	$146,000	$77,000
Fixed cost	94,000	163,000

Management expects the firm to produce 1,000 units during 2010.

Required

1. Assume that factory overhead was applied on the basis of direct labor-hours. Compute the predetermined factory overhead rate.

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2. If factory overhead were applied on the basis of machine-hours, what would be the plantwide overhead rate?

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3. If the company produced 1,000 units during the year, what was the total amount of applied factory overhead in each department in requirements 1 and 2?

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4. If you were asked to evaluate the performance of each department manager, which allocation basis (cost driver) would you use? Why?

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5. Compute the departmental overhead rates for each department.

Step 1 of 6

The formula for calculating predetermined overhead rate as follows: