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Goal: - To compare plantwide and departmental overhead allocation methods. Information: - Frogs, Inc. computes manufacturing overhead using either direct labor hours or direct material

Goal: - To compare plantwide and departmental overhead allocation methods.

Information: - Frogs, Inc. computes manufacturing overhead using either direct labor hours or direct material dollars, so the owners decided to reject the parking lot project at this time. However, based on your training and education, you are sure that the company has made a mistake and should have accepted the new job.

You have decided to explain the benefits of switching to the departmental method using separate rates for all four departments using last years data and comparing these cost analyses with the plantwide rates already shown. You want to explain the benefits of accepting this new job to the owners. The following table represents information about the four departments numbers from last year: -

Department Information

Concrete Casting

Design Department

Engineering

Owners

Projects per year

1,000 frog statues

200

200

200

Direct materials

$62,000

$10,000

$900,000

$1,000

Direct Labor Costs

5 Casters

$208,000

6 Designers

$436,800

3 Sr. and 5 Jr.

$447,200

2 Owners

$187,200

Direct Labor Hours

10,400

12,480

16,640

4,160

Totals for the year

$270,000

$446,800

$1,377,200

$188,200

All projects use both the Design Department and the Engineering Departments in addition to the Concrete Casting Department and the Owners work. All employees including the owners work the standard 2,080 hours each year. The total direct labor hours for the year are 43,680.

Design Department

Engineering Department

Concrete Casting

Owners

Overhead Costs

Setup Costs

$20,000

$60,000

$10,000

$3,000

Utilities

$10,000

$15,000

$5,000

$3,000

Equipment Fees

$0

$100,000

$5,000

$5,000

Permits

$5,000

$5,000

$0

$5,000

Travel to jobsite

$5,000

$20,000

$3,000

$5,000

Total

$40,000

$200,000

$23,000

$21,000

Required: -

  1. Compare and contrast the plantwide method with the departmental method of computing manufacturing overhead rates.

  1. Compute the overhead cost per unit using direct labor hours as the plantwide cost driver.

  1. Compute the overhead cost per unit using the departmental method. Use the projects per year as the cost driver for the Design Department and the Owners. Use the number of concrete frogs made for the Concrete Casting Department and the direct labor hours for the Engineering Department. You will have 4 department rates.

  1. Using your department rates for each department computed in question 3 and the DM and DL costs computed in Part 1, calculate the total cost of the project.

  1. Now, compute the overhead rates using the POHR for direct material dollars used ($0.70) for Concrete Casting. Compute the POHRs for the Design Department, the Engineering Department, and the Owners using direct labor hours as the cost driver.

  1. Using your department rates for each department computed in question 5 and the costs computed in Part 1, calculate the total cost of the project.

  1. What cost drivers do you think best represent the most accurate overhead rates for this job? Explain your answers for all 4 departments.

  1. At this point, would you accept or reject the job after using this new information?

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