180 Part One Job Order Cost Accounting

3. Name several volume-driven manufacturing overhead rates.

4. W hich o f the volume-drive bases are used m ost often? Why?
5. W hy is the materials costs basis rarely used?
6. W hat is the major limitation in using the units o f production as a manufacturing over
head rate?
7. How is the overhead application rate calculated under the machine hours basis?
8. W hat calculation is used when determ ining the overhead application rate under the
direct labor hours method? The direct labor costs method?
9. In selecting a basis for m anufacturing overhead rates, w hat guidelines should be
followed?
10. W hy are individual departm ental overhead rates often used rather than one single
factoryw ide rate? W hat are the advantages to m anagem ent in using departm ental
rates?
11. W hat basis should be used in calculating overhead rates in a business in which pro
duction volume varies greatly from year to year?
12. U nder what circumstances would you recom m end to managem ent that it use the
m achine hours basis for setting manufacturing overhead rates?
13. Discuss the difference between the direct labor hours basis and the direct labor costs
basis. U nder what circum stances should each m ethod be used by managem ent in
determ ining overhead rates?
14. W hen a factory is autom ated why does the use o f activity based cost drivers give a
m ore accurate allocation o f overhead costs?
15. Activities in the ABC costing method are typically divided into what four categories?
Give an example o f an activity that might be included in each category.

Exercises (8.1) C alcu late overhead ra tes. (O bj. 3). For the current year, 2006, the estim ated m anu
facturing overhead for the Preparing D epartm ent is $196,000. The estim ated num ber of
units o f production is 280,000. The company uses the units o f production basis for over
head rates. How much overhead should be applied to (a) Job 320 for 1,480 units and (b) Job
352 for 3,160 units?

(8.2) C alcu late overhead rates. (O bj. 3). Job 670 calls for 1,200 units to be produced. The
estim ate o f manufacturing overhead for the year for the Cutting D epartm ent is $42,000.
The company expects that direct materials will be $600,000 and total machine hours will
be 250,000. Job 670 incurred $5,300 in direct materials and used 3,284 machine hours.
How much m anufacturing overhead should be applied to Job 670 if the company uses (a \
the materials costs basis and (b) the machine hours basis?

(8.3) C alcu late overhead rates. (O bj. 3). Using the data below, calculate the amount of
m anufacturing overhead to be applied to Job 792 for 460 units, if (a) the direct labor hours
basis is used and (b) the direct labor costs basis is used.

Estimated manufacturing overhead for the year $296,772

Estimated direct labor hours 353,300 hours
Estimated direct labor costs $370,965
Job 792: direct labor hours used 1,580 hours
Job 792: direct labor costs incurred $ 1,770
 Chapter 8 Setting Overhead Rates 181

(8.4) C alculate overhead rates. (O bj. 3). The United Tailors Company used the direct labor
costs basis in establishing overhead rates for its producing departments. For the year 2006,
the company estimated the following manufacturing overhead budgets:

Building Services $48,860

Department 101 75,300
Department 102 83,800
Department 103 .78,518

Building Services is a service department that assists the producing departments. Its over
head is allocated to the producing departm ents on the basis o f floor space occupied. The
floor space occupied by each department is given below.

Square Feet Direct

Occupied Labor Costs
Department 101 2,660 $154,000
Department 102 1,900 148,860
Department 103 3,040 125,239

Determine the manufacturing overhead rates for each department for the year. Carry your
answers to six decimal places, round to five, and then change to percents.

C alcu late overhead rates. (O bj. 3). Assume the same facts as in Exercise 8.4, except
that the U nited Tailors Company uses the direct labor hours basis for overhead rates.
Determ ine the rates for the year if the estim ated direct labor hours are as shown below.
Round the rates to three decimal places.

Hours
Department 101 120,000
Department 102 150,000
Department 103 87,000

Canon Company has identified the following activities involved in their manufacturing
process. Classify each o f the activities as a unit-level activity, batch-level activity, product-
level activity, or facility-level activity.

a. M aterials handling
b. Depreciation on factory building
c. Design com pleted for new product
d. Buttons sewn on a suit jacket
e. Sewing machine setups
f. Company presidents salary
g. Inspection o f each group o f suits produced
182 Part One Job Order Cost Accounting

Problems (8.1 A) C alcu late d e p a rtm e n ta l overhead ra tes. (O bj. 3). A sum m ary o f the budget data for
the Assembly Department o f the Vera Cruz Company for the year 2006 is given here.

Manufacturing overhead costs $372,600

Units of production 155.000 units
Direct materials costs $436,170
Direct labor costs $525,760
Direct labor hours 119.000 hours
Machine hours 77,260 hours

Instructions
Determine the manufacturing overhead application rates under each o f the following bases.
Round percents to three decimal places and rates to the nearest whole cent.

a. Units o f production
b. Direct materials costs
c. M achine hours
d. Direct labor hours
e. D irect labor costs

(8.2A ) C alcu late and apply m a n u fa ctu rin g overhead. (O bj. 3). A summary o f budget data
for the Jones M anufacturing Group for the year 2006 is given below.

Manufacturing overhead costs $792,450

Direct materials costs $463,970
Direct labor costs $584,200
Direct labor hours 109,300 hours
Machine hours 83,890 hours

Instructions
1. Use each o f the following bases to determ ine the overhead application rate. Round to
three decimal places except for percents, which should be carried to six places and
rounded to five.
a. Materials costs
b. Direct labor costs
c. Direct labor hours
d. M achine hours

2. Prepare a schedule showing the amount o f overhead that would be applied to Job 53
using each application rate. Assume the following data for the job:

Direct materials costs $5,617

Direct labor costs $6,790
Direct labor hours 1,780 hours
Machine hours 562 hours

(8.3A ) C om plete a w orksheet for p ro ratin g service d ep a rtm e n t costs. (O bj. 4). D LM D re
M anufacturers, Inc. is divided into service departm ents and producing departments. Th
 Chapter 8 Setting Overhead Rates 183

W arehousing Department, which carries out receiving, storing, and shipping functions, and
the M aintenance D epartment are service departments. The Cutting, Sewing, and Finishing
D epartm ents are producing departments. The M aintenance D epartm ent serves the other
departments in proportion to the area occupied by each department.

Department Square Feet Occupied

Warehousing 10,500
Cutting 17,500
Sewing 14,000
Finishing 28,000

The costs o f the W arehousing Departm ent are allocated to the producing departm ents on
the basis o f the num ber o f materials requisitions processed.

Number of
Materials
Department Requisitions
Cutting 3,920
Sewing 5,880
Finishing 4,200

Instructions
1. Prepare a worksheet for prorating estimated service department costs for the year 2006.
The budgeted departmental overhead is as follows:

Estimated Direct
Department Departmental Overhead Costs
Maintenance $29,210
Warehousing 21,390
Cutting 35,870
Sewing 41,552
Finishing 26,760

2. Summarize your computations for the bases and the prorations on three-column analy
sis paper. (Keep your papers for use in Problem 8.4A.)

(8.4A ) C o m p u te o v erhead ap p lications rate s. (O bj. 4). This problem is a continuation o f

Problem 8.3A. The following data are provided:

Basis Cutting Sewing Finishing

Direct Labor Costs $85,000 $90,000 $110,000
Direct Labor Hours 24,000 hours 30,000 hours 27,000 hours
Machine Hours 6,600 hours 9,000 hours 8,300 hours
184 Part One Job Order Cost Accounting

Instructions
1. Compute three overhead application rates for each o f the three producing departments,
using the data above. Show your computations in equation form. Carry your answers to
three decimal places except for percents. Carry percents to six decimal places, and then
round to five.
2. W hich overhead application rate would you choose for each department? Why?

(8.5 A) C alculate overhead using activity based costing. (Obj. 6). Quality Park manufactures
two styles o f computer carrying cases, the Simply Portable Case and the Saddlebag Case.
Q uality Park uses activity based costing to assign overhead costs to its products. The fol
lowing activity centers have been identified:

Activity Center Cost Driver Allocation Rate

Materials Handling Cost of materials 4 % of material cost
Machine Setup No. of setups $180.00 per setup
Assembly No. of cases $23.00 per case
Inspection No. of cases $7.00 per case
Packaging and Shipping No. of orders $15.00 per order

Simply Portable Case Saddlebag Case

No. of cases 500 900
No. of setups 54 32
No. of orders 11 24
Material costs $10,000 $14,400

Instructions
1. Compute the total overhead costs assigned to each type o f case
2. Compute the overhead cost per case for each type o f case.

Alternate (8.1B) C a lc u la te d e p a rtm e n ta l overh ead ra te s. (Obj. 3). A sum m ary o f the budget data
p r jy .... . for the Finishing D epartm ent o f the Best H ardware Company for the year 2006 is given
here.

Manufacturing overhead costs $936,840

Units of production 450.000 hours
Direct materials costs $738,540
Direct labor costs $845,920
Direct labor hours 220.000 hours
Machine hours 84,500 hours

Instructions
Determine the manufacturing overhead application rates under each o f the following bas
Round percents to three decimal places and rates to the nearest whole cent.

a. Units o f production
b. Direct materials costs
c. M achine hours
d. Direct labor hours
e. Direct labor costs
 Chapter 8 Setting Overhead Rates 185

3.2B) C alculate a n d apply m a n u fa ctu rin g overhead. (O bj. 3). A summary o f budget data
for the Smith M anufacturing Group for the year 2006 is given below.

Manufacturing overhead costs $196,560

Direct materials costs $ 86,400
Direct labor costs $159,310
Direct labor hours 79,300 hours
Machine hours 16,050 hours

In s tr u c tio n s
1. Use each o f the following bases to determine the overhead application rate. Round to three
decimal places except for percents, which should be carried to six places and rounded to five.
a. M aterials costs
b. Direct labor costs
c. Direct labor hours
d. M achine hours

2. Prepare a schedule showing the amount o f overhead that would be applied to Job 61
using each application rate. Assume the following data for the job.

Direct materials costs $11,375

Direct labor costs $12,650
Direct labor hours 840 hours
Machine hours 230 hours

S.3B) C om plete a w orksheet fo r p ro ra tin g service d e p a rtm e n t costs. (O bj. 4). The Utah
W estern Shirt Company, Inc. is divided into service departm ents and producing depart
ments. The W arehousing Department, which carries out receiving, storing, and shipping
functions, and the Maintenance Departm ent are service departments. The Cutting, Sewing,
and Finishing D epartm ents are producing departments. The M aintenance Department
serves the other departments in proportion to the area occupied by each department.

Square Feet
Department Occupied
Warehousing 9,300
Cutting 15,500
Sewing 19,840
Finishing 17,360

The costs o f the W arehousing Departm ent are allocated to the producing departm ents on
the basis o f the num ber o f m aterials requisitions processed.

Number of
Materials
Department Requisitions
Cutting 968
Sewing 1,364
Finishing 2,068
186 Part One Job Order Cost Accounting

Instructions
1. Prepare a worksheet for prorating estimated service department costs for the year 2006.
The budgeted departmental overhead is as follows:

Estimated Direct
Department Departmental Overhead Costs
Maintenance $40,540
Warehousing 29,480
Cutting 43,410
Sewing 59,620
Finishing 35,372

2. Summarize your computations for the bases and the prorations on three-column analy
sis paper. (Keep your papers for use in Problem 8.4B.)

(8.4B ) C o m p u te o verhead ap p lication ra tes. (O bj. 4). This problem is a continuation of

Problem 8.3B. The following data are provided:

Basis Cutting Sewing Finishing

Direct Labor Costs $77,400 $82,000 $32,800
Direct Labor Hours 30,000 hours 60,000 hours 70,000 hours
Machine Hours 20,400 hours 7,100 hours 5,900 hours

Instructions
1. Compute three overhead application rates for each o f the three producing departments, using
the data above. Show your computations in equation form. Carry your answers to three dec
imal places except for percents. Carry percents to six decimal places, and then round to five.
2. W hich overhead application rate would you choose for each department? Why?

(8.5B ) C alcu late overhead using activity based costing. (O bj. 6). Etna Industries m anufac
tures two styles o f com puter keyboards, the M ultim edia Keyboard and the Com fort Type
Keyboard. Etna uses activity based costing to assign overhead costs to its products. The fol
lowing activity centers have been identified:

Activity Center Cost Driver Allocation Rate

Materials Handling Cost of materials 5% of material cost
Machine Setup No. of setups $160.00 per setup
Assembly No. of keyboards $12.00 per keyboard
Inspection No. of keyboards $5.00 per keyboard
Packaging and Shipping No. of orders $10.00 per order

Multimedia Keyboards Comfort Type Keyboards

No. of keyboards 400 700
No. of setups 45 25
No. of orders 9 16
Material costs $6,000 $7,700