Question:
(Plant vs. departmental OH rates) Idaho Mechanical Systems has two departments: Fabrication and Finishing. Three workers oversee the 25 machines in Fabrication. Finishing uses 35 crafters to hand-polish output, which is then run through buffing machines. Product CG9832-09 uses the following amounts of direct labor and machine time in each department:
|
Fabrication
|
Finishing
|
|
Machine hours
|
10.00
|
0.30
|
|
Direct labor hours
|
0.02
|
2.00
|
Following are the budgeted overhead costs and volumes for each department for the upcoming year:
|
Fabrication
|
Finishing
|
|
Budgeted overhead
|
$635,340
|
$324,000
|
|
Budgeted machine hours
|
72,000
|
9,300
|
|
Budgeted direct labor hours
|
4,800
|
48,000
|
a. What is the plantwide OH rate based on machine hours for the upcoming year? How much overhead will be assigned to each unit of Product CG9832-09 using this rate?
b. Idaho Mechanical's auditors inform management that departmental predetermined OH rates using machine hours in Fabrication and direct labor hours in Finishing would be more appropriate than a plantwide rate. What would the OH rates be for each department? How much overhead would have been assigned to each unit of Product CG9832-09 using departmental rates?
c. Discuss why departmental rates are more appropriate than plantwide rates for Idaho Mechanical.