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IDAHO CORPORATION   …

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IDAHO CORPORATION

 

….. produces widgets and currently uses a plantwide overhead rate, based on machine hours. Markoff, the plant manager, has heard about departmental overhead application rates in his cost accounting class and feels that these rates can offer significantly better cost assignments than can a plantwide rate.

 

They have the following data for its two departments for the coming year:

 

		Dept A	Dept B
Budgeted overhead costs		$720,000	$180,000
Normal activity (machine hours)		120,000	60,000

 

 

 

REQUIRED:

 

1. What is meant by normal activity?  Why would they consider choosing this to use this as their denominator application rate?  What advantages and disadvantages would there be?

 

 

2. What’s the difference between a plantwide rate and a departmental rate?  Conceptually, why would a departmental be better?

 

 

3. Compute a predetermined overhead rate for the plant as a whole based on machine hours.

 

 

4. Compute predetermined overhead rates for each department using machine hours.

Suppose that a widget (Product Alpha) used 60 machine hours from Department A and 150 machine hours from Department B. A second widget (Product Beta) used 150 machine hours from Department A and 60 machine hours from Department B:

 

5. Compute the overhead cost assigned to each product using:

 

 

6. Which of the two approaches gives the fairest assignment? WHY?

 

 

7. NOW ASSUME that the expected overhead cost for Department B is $360,000.  How much overhead would be assigned to each product using

1. the plantwide rate, and
2. the departmental rates

 

Explain WHY your answers came out the way they did.

8. NOW would you recommend departmental rates over a plantwide rate?