Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 24

Departmental Overhead Rates
Mariposa, Inc., produces machine tools and currently uses a plantwide overhead rate, based on machine hours. Harry Whipple, the plant manager, has heard that departmental overhead rates can offer significantly better cost assignments than can a plantwide rate.
Mariposa has the following data for its two departments for the coming year:

Required:
1. Compute a predetermined overhead rate for the plant as a whole based on machine hours.
2. Compute predetermined overhead rates for each department using machine hours.
3. Suppose that a machine tool (Product X75) used 60 machine hours from Department A and 150 machine hours from Department B. A second machine tool (Product Y15) used 150 machine hours from Department A and 60 machine hours from Department B. Compute the overhead cost assigned to each product using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Which of the two approaches gives the fairest assignment? Why?
4. Repeat Requirement 3 assuming the expected overhead cost for Department B is $360,000. Now would you recommend departmental rates over a plantwide rate?