Plantwide versus department overhead cost rates. (CMA, adapted) Merrick Corporation manufactures a complete line of fibreglass attaché cases and suitcases. Merrick has three _|. Planitwide overhead rate, manufacturing departments (moulding, component, and assembly) and two support depart- $26.36 per DMLH ments (maintenance and power).

The sides of the cases are manufactured in the moulding department. The frames, hinges, locks, and so on are manufactured in the component department. The cases are completed in the assembly department. Varying amounts of materials, time, and effort are required for each of the various cases. The maintenance and power departments provide services to the three manufacturing departments.

Merrick has always used a plantwide manufacturing overhead rate. Direct manufacturing labour-hours (DMLH) are used to allocate the overhead to each product. The budgeted rate is calculated by dividing the company’s total budgeted manufacturing overhead cost by the total budgeted DMLH to be worked in the three manufac- Activity Based Costing and turing departments.

Whit Portlock, manager of Cost Accounting, has recommended that Merrick use department overhead rates. Portlock has projected operating costs and production levels for the coming year. They are presented (in thousands) by department in the following tables:

REQUIRED 1. Calculate the plantwide overhead rate for Merrick Corporation for the coming year using the same method as used in the past.
2. Whit Portlock has been asked to develop department overhead rates for comparison with the plantwide rate. Follow these steps in developing the department rates:

a. Allocate the maintenance department and power department costs to the three manufacturing departments.

b. Calculate department overhead rates for the three manufacturing departments using a machine-hour allocation base for the moulding department and a direct manufacturing labour-hour (DMLH) allocation base for the component and assembly departments.
3. Should Merrick Corporation use a plantwide rate or department rates to allocate overhead to its products? Explain your answer.LO1

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Manufacturing Department Moulding Component Department Operating Data: Direct labour-hours 600 3,000 Assembly 1,400 Machine hours 800 200 Department Costs: Direct materials Direct labour $16,400 $42,000 $ 1,800 5,200 28,000 16,500 Department overhead 30,000 24,000 29,000 Total departmental costs $51,600 $94,000 $47,300 Use of Support Departments: Estimated usage of maintenance resources (in labour-hours) 100 30 20 Estimated usage of power (in kilowatt hours) 400 380 120 Estimated costs of the maintenance department are $12,800 and of the power department are $36,000.