Q16E - Horngren'S Financial And Managerial Accounting

Question

Koehler (see Exercise E19-15) makes handheld calculators in two models—basic and professional—and wants to refine its costing system by allocating overhead using departmental rates. The estimated \(721,000 of manufacturing overhead has been divided into two cost pools: Assembly Department and Packaging Department. The following data have been compiled:

                                            Assembly                  Packaging

                                           Department               Department                   Total

Overhead costs                  \) 456,500                    \( 264,500                 \) 721,000

Machine hours:

Basic Model                     185,000 MHr                    45,000 MHr           230,000 MHr

Professional Model         230,000 MHr                    55,000 MHr           285,000 MHr

Total                                 415,000 MH                    100,000 MHr           515,000 MHr

Direct labor hours:

Basic Model                      20,000 DLHr                   50,000 DLHr          70,000 DLHr

Professional Model        105,125 DLHr                 280,625 DLHr        385,750 DLHr

Total                                 125,125 DLHr                 330,625 DLHr        455,750 DLHr

 

Compute the predetermined overhead allocation rates using machine hours as the allocation base for the Assembly Department and direct labor hours for the Packaging Department. How much overhead is allocated to the basic model? To the professional model? Round allocation rates to two decimal places and allocated costs to whole dollars.

Step-by-Step Solution

Answer

Predetermined overhead allocation rate

For Assembly department: $1.1 MHr

For Packaging department: $0.8 DLHr

 

Total overhead allocation to Basic Model: $243,500

Total overhead allocation to Professional Model: $477,500

Step-by-Step-Solution Step 1: Computation of predetermined overhead allocation rate

$\begin{array}{c} \mathrm{For} \mathrm{Assembly} \mathrm{department}=\frac{\mathrm{Total} \mathrm{Over} \mathrm{head} \mathrm{cost} \mathrm{in} \mathrm{assembling} \mathrm{department}}{\mathrm{Total} \mathrm{machine} \mathrm{hour} \mathrm{in} \mathrm{assebmling} \mathrm{department}}\\ =\frac{\mathrm{\$}456,500}{415,000}\\ =\mathrm{\$}1.1\mathrm{MHr}\end{array}$

$\begin{array}{c}\mathrm{For} \mathrm{Packaging} \mathrm{department}=\frac{\mathrm{Total} \mathrm{Overhead} \mathrm{cost} \mathrm{in} \mathrm{packaging} \mathrm{department}}{\mathrm{Total} \mathrm{direct} \mathrm{labor} \mathrm{hour} \mathrm{in} \mathrm{packaging} \mathrm{department}}\\ =\frac{\mathrm{\$}264,500}{330,625}\\ =\mathrm{\$}0.8\mathrm{DLHr}\end{array}$

Step 2: Computation Overhead allocation of assembly department

	Predetermined overhead allocation rate	X	Actual quantity of allocation base	=	Allocated overhead cost
Basic Model	$1.1 MHr	X	185,000 MHr	=	$203,500
Professional Model	$ 1.1 MHr	X	230,000 MHr	=	$253,000
Total					$456,500

Step 3: Computation Overhead allocation of packaging department

	Predetermined overhead allocation rate	X	Actual quantity of allocation base	=	Allocated overhead cost
Basic Model	$0.8 DLHr	X	50,000 MHr	=	$40,000
Professional Model	$ 0.8 DLHr	X	280,625 MHr	=	$224,500
Total					$264,500

Step 4: Computation of total overhead cost for each model

	Basic Model	Packaging Model
Assembly Department	$203,500	$253,000
Packaging Department	$40,000	$224,500
Total	$243,500	$477,500