Factory Overhead Plantwide and Departmental Rates PDF

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Factory Overhead Plantwide and Departmental Rates...

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) Rivera Company manufactured two products, A and B, during April. For purposes of product costing, an overhead rate of $2.00 per direct-labor hour was used, based on budgeted annual factory overhead of $500,000 and 250,000 budgeted annual direct-labor hours, as follows:

Department 1 Department 2

Budgeted Overhead $300,000 200,000 $500,000

Budgeted Hours 200,000 50,000 250,000

The number of labor hours required to manufacture each of these products was:

In Department 1 In Department 2 Total

Product A 3 1 4

Product B 1 3 4

During April, production units for products A and B were 1,000 and 3,000, respectively. Required: (1) Using a plantwide overhead rate, what are total overhead costs assigned to products A and B, respectively? (2) Using departmental overhead rates, what are total overhead costs assigned to products A and B, respectively? (3) Assume that materials and labor costs per unit of Product B are $10 and that the selling price is established by adding 40% of total costs to cover profit and selling and administrative expenses. What difference in selling price would result from the use of departmental overhead rates?

Answer: Calculation process may vary. (1) Using Plantwide Overhead Rate Product A: $2.00 × 4 hours × 1,000 units = $8,000 Product B: $2.00 × 4 hours × 3,000 units = $24,000 (2) Using Departmental Rates Department 1 Rate: $300,000/200,000 = $1.5 per direct labor hour Department 2 Rate: $200,000/50,000 = $4 per direct labor hour Product A: [($1.5 × 3) + ($4 × 1)] × 1,000 = $8,500 Product B: [($1.5 × 1) + ($4 × 3)] × 3,000 = $40,500 (3) Product B

Prime cost Overhead* Total cost 40% markup Selling price

Using Plantwide Rate $10.00 8.00 18.00 7.20 25.20

Using Department Rates $10.00 13.50 23.50 9.40 32.90

Increase in selling price $32.90 − $25.20 = $7.70 *Overhead calculations: Using plantwide rate $2.00 × 4 = $8 per unit Using departmental rates ($1.5 × 1) + ($4 × 3) = $13.50 per unit...