Garza Corporation has two production departments, Casting and Customizing. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The Casting Department's predetermined overhead rate is based on machine-hours and the Customizing Department's predetermined overhead rate is based on direct labor-hours. At the beginning of the current year, the company had made the following estimates: The estimated total manufacturing overhead for the Customizing Department is closest to:
A) $54,110
B) $30,100
C) $98,700
D) $68,600

Question

Garza Corporation has two production departments, Casting and Customizing. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The Casting Department's predetermined overhead rate is based on machine-hours and the Customizing Department's predetermined overhead rate is based on direct labor-hours. At the beginning of the current year, the company had made the following estimates:  The estimated total manufacturing overhead for the Customizing Department is closest to:
A) $54,110 
B) $30,100 
C) $98,700 
D) $68,600

Quizplus · Accepted Answer

The estimated total manufacturing overhead for the Casting Department is $218,000, which is based on the predetermined overhead rate of $20 per machine-hour and estimated machine-hours of 10,900. 
The estimated total manufacturing overhead for the entire company is $343,000, which is the sum of the estimated overhead for the Casting Department and the estimated overhead for the Customizing Department ($218,000 + X = $343,000). 
To solve for X (the estimated overhead for the Customizing Department), we need to subtract the estimated overhead for the Casting Department from the estimated total overhead for the company ($343,000 - $218,000 = $125,000). 
Finally, we can use the predetermined overhead rate for the Customizing Department to calculate the estimated direct labor-hours for the department:

Predetermined overhead rate = Estimated overhead / Estimated direct labor-hours

$15 per direct labor-hour = $125,000 / Estimated direct labor-hours

Estimated direct labor-hours = $125,000 / $15 per direct labor-hour = 8,333.33 direct labor-hours

Therefore, the estimated total manufacturing overhead for the Customizing Department is:

Predetermined overhead rate x Estimated direct labor-hours = $15 per direct labor-hour x 8,333.33 direct labor-hours = $125,000

However, we are asked only for the estimated manufacturing overhead for the Customizing Department, not the entire company. Therefore, we need to subtract the estimated overhead for the Casting Department from the total overhead of the company, and we get:

Estimated overhead for Customizing Department = $343,000 - $218,000 = $125,000

So, the closest answer choice to the estimated overhead cost of the Customizing Department is $98,700 (Choice C).

Garza Corporation Has Two Production Departments, Casting and Customizing