Departmental versus Plantwide Applications The following are pertinent data for the Alou Company:

(S1) (S2) (P1) (P2)

Factory \, Production Budget Data for 19_7 Personnel Planning and Control Machining Assembly Predicted overhead $51,000 $198,500 $2,235,500 $755,000 Machine-hours ; 300,000 _ Direct-labor hours 40,000 500,000 Orders to be processed 8,000 2,000 Number of employees 10 30 300

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Factory personnel-department costs are to be reapportioned on the basis of number of employees; production planning and control, on the basis of orders processed. The step basis is used for reapportionment.

This company produces a wide variety of products on a job-order basis.

Management has always used a single, plantwide overhead application rate based on ‘direct-labor hours.

Recently, however, customer complaints on price quotations, plus the outside auditor’s criticism of the plantwide rate, has prompted management to ask you, the controller, to restudy the situation before setting rates for 19_7.

~ You decide that departmental overhead rates should be developed, at least as a method of attack. You think that a machine-hour rate should be used for the machining department, which contains costly automatic and semiautomatic equipment manned by a few workers who tend and control many machines simultaneously.

The workers may operate a couple of machines at a time on certain jobs, and as many as six machines or more on other jobs. Because the assembly department requires painstaking workmanship but little equipment, you think that direct-labor hours is the most proper overhead base there.

The budget data for 19_7 are little different from those for 19_6, so you pick five representative jobs worked on during December 19_6 as a basis for comparing the blanket rate with departmental rates. You keep careful records of machine-hours as well as of the direct-labor hours. The results follow:

MACHINING ASSEMBLY Job Number Machine-Hours DLH DLH 300 5 2 10 301 40 4 40 302 10 2 30 303 Ud 1 3)

304 Ws 11 30

(Show and label computations)

- Departmental overhead rates.

. Plantwide rate.

- A detailed summary by jobs of

(a) total overhead applied, using departmental rates;

(b) total overhead applied, using a plantwide rate;

(c) difference be- tween

(a) and (b).

- What is the total difference for the jobs taken together? - What overhead application base would you recommend? Why?

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