OVERHEAD APPLIED TO JOBS, DEPARTMENTAL OVERHEAD RATES
Watson Products Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Marlon Burke, the plant manager, has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Watson has the following data for its two departments for the coming year:
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Department A
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Department B
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Overhead costs (expected)
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$50,000
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$22,000
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Normal activity (machine hours)
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20,000
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16,000
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Required:
1. Compute a predetermined overhead rate for the plant as a whole based on machine hours.
2. Compute predetermined overhead rates for each department using machine hours. (Carry your calculations out to three decimal places.)
3. 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. Which of the two approaches gives the fairer assignment? Why?
4. Repeat Requirement 3, assuming the expected overhead cost for Department B is $40,000 (not $22,000). For this company, would you recommend departmental rates over a plantwide rate?