Hobart Company manufactures attach cases and suitcases. It has five manufacturing departments. The Molding, Component, and Assembly

Hobart Company manufactures attaché cases and suitcases. It has five manufacturing departments. The Molding, Component, and Assembly departments convert raw materials into finished goods; hence, they are treated as operating departments. The Power and Maintenance departments are treated as service departments because they support the three operating departments.

Hobart has always used a plantwide predetermined overhead rate with direct labor-hours as the allocation base for product costing purposes. The overhead rate is computed by dividing the company’s total estimated overhead cost (across the five manufacturing departments) by the total estimated direct labor-hours to be worked in the three operating departments.

The company has been experiencing declining profits; therefore, it is considering switching from plantwide overhead allocation to a departmental approach. Under the departmental approach, the service department costs would be allocated to the three operating departments. Then each operating department would compute its own overhead rate. The overhead rate in Molding would be based on machine-hours and the rates in Component and Assembly would be based on direct labor-hours.

The service departments’ estimated costs for the coming year are as follows:

The Power Department would allocate its variable costs to the operating departments based on estimated kilowatt hours used and it would allocate its fixed costs based on the percentage of peak-period capacity required. The Maintenance Department would allocate its variable costs to the operating departments based on estimated maintenance hours used and it would allocate its fixed costs based on the percentage of peak-period capacity required. The corresponding data for allocating service department costs to operating departments are as follows:

The company also provided the following estimated data for its three operating departments:

Required:

1. Compute the company’s predetermined plantwide overhead rate.

2. Assume the company decides to use departmental overhead rates.

a. Using the direct method, allocate the variable and fixed service department costs to the operating departments.

b. Calculate the predetermined departmental overhead rates for each of the three operating departments.

3. One of Hobart’s products is a small attaché case that uses the following machine-hours and direct labor-hours in the three operating departments:

a. Calculate the amount of overhead that would be applied to this attaché case using the plantwide approach.

b. Calculate the amount of overhead that would be applied to this attaché case using the departmental approach.

4. Is the plantwide approach overcosting or undercosting the attaché case compared to the departmental approach? If the company uses cost-plus pricing, how would plantwide overhead allocation affect its price setting decisions?

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Service Departments Power Maintenance Variable overhead cost $ 640,000 $ 25,000 ..... Fixed overhead cost.. 1,200,000 375,000 Total overhead cost... $1,840,000 $400,000