Ch4 Departmental Overhead Allocation PDF

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Chapter 4: Activity-Based Costing Departmental Overhead Allocation Simple Cost Allocation Systems  Using a “plantwide overhead rate” can result in “cost distortion”. o Some products are overcosted, while others are undercosted. Total Plantwide OH Plantwide OH rate

Job 101

Job 102

Job 102

Departmental Overhead Rates  Can provide a more accurate allocation of OH costs if: o Different departments have different amounts and types of OH o Different jobs or products use the departments to a different extent.  Four Steps for Allocating MOH using Departmental OH Rates o STEP 1: Estimate the total MOH costs for the coming year in each department. o STEP 2: Select an allocation base and estimate the total expected for the coming year in each department. o STEP 3: Calculate the predetermined OH rate for each department using the total MOH costs, and allocation bases for each department. Total estimated departmental OH Total estimated amount of departmental Allocation base

(Step 1) (Step 2)

=

Predetermined Departmental OH Rate

o STEP 4: Allocate MOH to the individual jobs from each department. Predetermined Departmental OH Rate (Step 3)

*

STEP 1-3: BEGINNING OF THE PERIOD STEP 4: THROUGHOUT THE PERIOD

Actual amount of departmental allocation base

= Departmental Allocated OH

Total Plantwide OH

Machining Dept.

Finishing Dept.

Machining OH Rate

Finishing OH Rate

Job 101

Job 102

Job 103

Example Davidson’s Fine Furnishings manufactures upscale custom furniture. It currently uses a plantwide OH rate based on DL hours to allocate its total MOH of $1,392,000. Estimated DL hours are 18,000 for the year. $1,392,000 = $77/DL hr (Simple Cost Allocation) 18,000 DL hrs

They are considering refining the costing system by using department OH rates, using the below information from its two departments: Machining and Finishing. Allocation Base Estimated total OH Cost Driver Est. Cost Driver Amt. Machining Dept. $600,000 machine hours 15,000 Finishing Dept. $792,000 direct labor hours 18,000 Machining: Finishing:

$600,000/15,000 MH = $40/MH $792,000/18,000 DL Hrs. = $44/DL Hr.

Job 450 was completed on May 15. Below is the actual activity for the job: Machining Dept. Finishing Dept. Direct labor hours used 3 8 Machine hours used 7 1 Machining: $4/MH * 7MH = $280 Finishing: $44/DL Hr. * 8 DL Hrs. = $352 Total Allocated OH: $280 + $352 = $632 Total Product Cost = DM + DL + OH...