Cermak’s Fine Furnishings manufactures upscale custom furniture. Cermak Fine Furnishings currently uses a plantwide overhead rate based on direct labour hours to allocate its $1,100,000 of manufacturing overhead to individual jobs. However, Ernie Cermak, owner and CEO, is considering refining the company’s costing system by using departmental overhead rates. Currently, the Machining Department incurs $750,000 of MOH while the Finishing Department incurs $350,000 of MOH. Ernie has identified machine hours (MH) as the primary MOH cost driver in the Machining Department and direct labour (DL) hours as the primary cost driver in the Finishing Department.

Cermak Fine Furnishings’s plant completed Jobs 450 and 455 on May 15. Both jobs incurred a total of 6 DL hours throughout the entire production process. Job 450 incurred 2 MH in the Machining Department and 5 DL hours in the Finishing Department (the other DL hour occurred in the Machining Department). Job 455 incurred 6 MH in the Machining Department and 4 DL hours in the Finishing Department (the other two DL hours occurred in the Machining Department).

Requirements

1. Compute the plantwide overhead rate assuming that Cermak expects to incur 25,000 total DL hours during the year.

2. Compute departmental overhead rates assuming that Cermak expects to incur 15,000 MH in the Machining Department and 17,500 DL hours in the Finishing Department during the year.

3. If Cermak continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455?

4. If Cermak uses departmental overhead rates, how much MOH would be allocated to Job 450 and Job 455?

5. Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either job? Explain. If Cermak sells his furniture at 125% of cost, will his choice of allocation systems affect product pricing? Explain.