Single rate versus departmental rates Bravo Steel Company supplies structural steel products to the construction industry. Its plant has three production departments: cutting, grinding, and drilling. The estimated overhead cost and practical capacity direct labor hours and machine hours for each department for the current year follow:
| CUTTING | GRINDING | DRILLING | ||
| Overhead Cost | 504000 | 2304000 | 2736000 | |
| Estimated Direct Labor Hours | 60000 | 96000 | 144000 | |
| Estimated machine hours | 960000 | 480000 | 360000 | |
| Job ST101 consumed the following direct labor and machine hours: | ||||
| CUTTING | GRINDING | DRILLING | ||
| Direct labor hours | 2000 | 2500 | 3000 | |
| Machine hours | 20000 | 3000 | 2000 |
(a) Suppose that a plantwide cost driver rate is computed by dividing plantwide overhead costs by plantwide practical capacity direct labor hours. Determine the overhead cost applied to job ST101.
(b) Determine the departmental cost driver rates and overhead costs applied to job ST101 if machine hours are used as the cost driver in the cutting department and direct labor hours are used as the cost driver for the grinding and drilling departments.
(c) Explain why Bravo Steel might prefer a plantwide rate or departmental cost driver rates.
Answer:
a)
| Plantwide overheads:- | ||
| Cutting Department Overhead Cost | = | $5,04,000 |
| Grinding Department Overhead Cost | = | $23,04,000 |
| Drilling Department Ovehead Cost | = | $27,36,000 |
| Total Plantwide Overhead Cost | = | $55,44,000 |
| Plantwide Labor hours:- | ||
| Cutting Department Estimated labor hours | = | 60000 |
| Grinding Department Estimated labor hours | = | 96000 |
| Drilling Department Estimated labor hours | = | 144000 |
| Total Plantwide Estimated labor hours | = | 300000 |
| Plantwide overhead cost per labor hour:- | ||
| Total Plantwide Overhead Cost/Total Plantwide Estimated labor hours | ||
| 5544000/300000 | ||
| $18.48 | ||
Computation of overhead cost applied to job ST 101
| CUTTING | GRINDING | DRILLING | Total | ||
| Direct labor hours used on Job ST 101 | 2000 | 2500 | 3000 | 7500 |
| Overhead cost to be applied to job ST 101:- | ||
| Total plantwide labor hours * Plantwide overhead absorption rate | ||
| 7500*18.48 | ||
| $1,38,600 | ||
(b)
Computation of overhead absorption rate (Department wise):-
| Cutting | Grinding | Drilling | |
| Overhead Cost | $5,04,000.00 | $23,04,000.00 | $27,36,000.00 |
| Estimated Direct Labor Hours | 60000 | 96000 | 144000 |
| Estimated machine hours | 960000 | 480000 | 360000 |
| Overhead absorption rate (based on labor hours) | $24.00 | $19.00 | |
| overhead absorption rate (based on Machine hours) | $0.53 |
Computation of overhead cost applied to job ST 101:-
| CUTTING | GRINDING | DRILLING | Total | |
| Direct labor hours used on Job ST 101 | 2500 | 3000 | ||
| Direct Machine hours used on Job ST 101 | 20000 | |||
| Overhead cost to be applied to job ST 101:- | ||||
| Cost driver * Department wise overhead absorption rate | $10,500.00 | $60,000.00 | $57,000.00 | $1,27,500.00 |
(c)
Bravo Steel might prefer department wise overhead cost driver rates because allocating cost on the basis of department wise cost driver will provide a more realistic overhead obsorption rate as compared to plantwise overhead absorption rate.
Plantwide absorption rate is suitable for organisation in which all the departments are homogeneous.
