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# How to calculate plantwide overhead rate

Managerial Accounting

Scannell Industries manufactures a variety of custom products. The company has traditionally used a plantwide manufacturing overhead rate based on machine hours to allocate manufacturing overhead to its products. The company estimates that it will incur \$ 1,820, 000 in total manufacturing overhead costs in the upcoming year and will use 10,000 machine hours.

Up to this​ point, hazardous waste disposal fees have been absorbed into the plantwide manufacturing overhead rate and allocated to all products as part of the manufacturing overhead process.​ Recently, the company has been experiencing significantly increased waste disposal fees for hazardous waste generated by certain products​, and as a​ result, profit margins on all products have been negatively impacted. Company management wants to implement an​ activity-based costing system so that managers know the cost of each product​, including its hazardous waste disposal costs.

Expected usage and costs for manufacturing overhead activities for the upcoming year are as​ follows:

During the​ year, Job 352 is started and completed. Usage for this job​ follows:

.

Requirement 1. Calculate the cost of

Job 352Job 352

Begin by calculating the plantwide overhead rate. First identify the formula used to compute the plantwide overhead​ rate, then compute the rate. ​(Abbreviations used: MOH​ = manufacturing​ overhead; mfg.​ = manufacturing)

/

=

/

=

Calculate the cost of Job 352.

Job Cost Record

Manufacturing

JOB 352

Costs

Total job cost

Requirement 2. Calculate the cost of Job 352 using​ activity-based costing.

Begin by calculating the allocation rate for each activity. First determine the formula to compute the allocation rate in an​ activity-based costing​ system, then compute the rate for each activity. ​(Abbreviations used: est.​ = estimated,​ MH=machine hours,​ Mach.=Machine, Eng.=Engineering)

Activity cost

/

=

allocation rate

Mach. maintenance

/

=

per MH

Eng. change orders

/

=

per order

Waste disposal

/

=

per pound

Calculate the cost of Job 352 using​ activity-based costing.

Job Cost Record

Manufacturing

JOB 352

Costs

Total job cost

Requirement 3. If you were a​ manager, which cost estimate would provide you more useful​ information? How might you use this​ information?

1. The cost estimate based on the ________________________ would provide more useful information because this cost estimate.

2. takes into account __________________________ This information can be used to

____________________.

2) Farmer's Fine Furnishings manufactures upscale custom furniture. Farmer'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, Deana Howards​,

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. Deana 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.

Requirement 1. Compute the plantwide overhead rate assuming that

Farmer'sFarmer's

expects to incur

30 comma 00030,000

total DL hours during the year.

First identify the​ formula, then compute the rate. ​(Round your answer to the nearest whole​ dollar.)

/

=

/

=

Requirement 2. Compute departmental overhead rates assuming that Farmer'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

/

=

Machining

/

=

per mach. hour

Finishing

/

=

per DL hour

Requirement 3. If Farmer'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.)

x

=

allocated

Job 450

x

=

Job 455

x

=

Requirement 4. If Farmer'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

Requirement 5. Based on your answers to Requirements 3 and​ 4, does the plantwide overhead rate overcost or undercost either​ job? Explain. If Farmer's sells its furniture at​ 125% of​ cost, will its choice of allocation systems affect product​ pricing? Explain.

The single plantwide rate _______ Job 450 by \$ _________ and ________ Job 455 by \$ ___________.

Since Farmer's sets its sales price at​ 125% of​ cost, and the job cost is _________ by the allocation system it​ uses, its sales price will __________ by the allocation system it uses.

3) Farris & Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients. Farris charges customers at a billing rate equal to 134​% of the​ client's total job cost. A​client's total job cost is a combination of​ (1) professional time spent on the client

​(\$ 64 per hour cost of employing each​ professional) and​ (2) operating overhead allocated to the​ client's job. Farris allocates operating overhead to jobs based on professional hours spent on the job.

Farris estimates its five professionals will incur a total of​ 10,000 professional hours working on client jobs during the year.

Amy Little hired Farris to design her kitchen remodeling. A total of 20 professional hours were incurred on this job. In​ addition, Little’s remodeling job required one of the professionals to travel back and forth to her house for a total of 155 miles. The blueprints had to be copied four times because Little changed the plans several times. In​ addition, 21 hours of secretarial time were used lining up the subcontractors for the job.

Requirement 1. Calculate the current indirect cost allocation rate per professional hour. ​(Round your answer to the nearest​ cent.)

The current indirect cost allocation rate per professional hour is \$ _________.

Requirement 2. Calculate the total amount that would be billed to

Little given the current costing structure. Determine the​ formula, then calculate the amount that would be billed to Little given the current costing structure. ​(Round all amounts to the nearest​ cent.)

x

=

Amount billed to client

x

=

Requirement 3. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.

Determine the​ formula, then calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs. ​(Round the rates to the nearest​ cent.)

/

=

Activity cost allocation rate

Transportation to clients

/

=

per mile

Blueprint copying

/

=

per copy

Office support

/

=

per secretarial hour

Requirement 4. Calculate the amount that would be billed to

Little using ABC costing.

Determine the​ formula, then calculate the amount that would be billed to Little using ABC costing. ​(Round all amounts to the nearest​ cent.)

x

=

Amount billed to client

x

=

Requirement 5. Which type of billing system is more fair to​ clients? Explain.

The ____ billing system is more fair to clients because they are charged according to ______

For​ example, copying blueprints is _________. Under the fairer​ system, clients are charged

__________ blueprint copies that their job required. The fairer system better recognized the extent to which ______ costs are incurred by each unique client job.

4) Chaney Products has adopted an ABC costing system. The following manufacturing​ activities, indirect manufacturing​ costs, and cost drivers have been​ identified:

The Job Cost Record for Job

​#624 revealed that direct materials requisitioned for the job totaled

\$ 1,020. The Job Cost Record also showed that direct labor for this job totaled 99 hours at a wage rate of

\$ 29 per hour. Other data collected on the resources used by Job

​#624 included:

Requirement 1. Calculate the activity cost allocation rate for each of the five pools listed in the table. ​(Round the allocation rate to the nearest cent. Abbreviations​ used: DL​ = direct​ labor; MH​ = machine​ hour.)

Activity cost

/

=

allocation rate

Machine setup

/

=

per setup

Machining

/

=

per MH

Polishing

/

=

per cloth

Quality control

/

=

per test

Facility level costs

/

=

per DL hour

Requirement 2. Calculate the total cost of Job #624 (use an ABC costing​ system).

Job Cost Record

Manufacturing

JOB # 624

Costs

____________ _______________

____________ _______________

____________ _______________

Total job cost ______________

Requirement 3. Why would ABC provide a more accurate allocation of manufacturing overhead​ (MOH) than a plantwide​ rate?

The cost estimate based on ABC would provide a more accurate allocation of MOH than a plantwide rate because this cost estimate takes into account _________ This information can be used to _________.

Requirement 4. Assume that Chaney Products used a traditional costing system rather than an ABC system. Its plantwide MOH rate would have been determined using direct labor​ (DL) hours as the allocation base. How much cost distortion would have occurred on this​ job?

Begin by calculating the plantwide overhead rate. First identify the formula used to compute the plantwide overhead​ rate, then compute the rate.​ (Round the rate to the nearest whole​ dollar.)

/

=

/

=

How much cost distortion would have occurred on this​ job? ​(Use parentheses or a minus sign for​ under-costed amounts.)

Job #624

Less: ABC ____________

Cost distortion difference _____________

Speakers Direct manufactures​ high-quality speakers. Suppose

Speakers Direct is considering spending the following amounts on a new quality​ program:

Speakers Direct expects this quality program to save costs as​ follows:

It also expects this program to avoid lost profits from the​ following

1.

Classify each of these costs into one of the four categories of quality costs​ (prevention, appraisal, internal​ failure, external​ failure).

2.

Should Speakers Direct implement the quality​ program? Give your reasons.

1. First classify each of these costs into one of the four categories of quality​ costs, then prepare a​ cost-benefit analysis of the proposed quality program based on the four categories identified. ​(Use a minus sign or parentheses for savings​ amounts.)

Cost (Benefit) Analysis Costs Saving

Prevention costs:

________________

Appraisal costs:

Internal failure costs:

External failure costs:

Net cost (benefit) from implementing quality program ________ _

2. Should Speakers Direct implement the quality​ program?

Speakers Direct _______ the new quality program. The company________ \$ __________ by

implementing the new program.

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