1. P7.37

Plantwide versus departmental overhead rates; actual and normal costing: manufacturer LO 7.3, 7.4, 7.7

Noteperfect Ltd manufactures sheet music stands in two separate departments, cutting and welding. The following data relate to the year just ended:

	Cutting department	Welding department	Total plant
Budgeted manufacturing overhead	$60 000	$120 000	$180 000
Actual manufacturing overhead	54 000	108 000	162 000
Budgeted machine hours	24 000	96 000	120 000
Actual machine hours	27 000	90 000	117 000
Budgeted direct labour hours	30 000	15 000	45 000
Actual direct labour hours	29 400	11 700	41 100

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One of Noteperfects major products, the A Frame, has the following production requirements:

	Product: A Frame
	Cutting department	Welding department	Total plant
Machine hours	2.5	4.0	6.5
Direct labour hours	4.0	1.0	5.0

Required:

1. Calculate the manufacturing overhead cost of the A Frame using:
   1. (a)a predetermined plantwide rate based on direct labour hours
   2. (b)a predetermined plantwide rate based on machine hours
   3. (c)predetermined departmental rates based on direct labour hours for the cutting department and on machine hours for the welding department.

Which of these three estimates of overhead cost is likely to be the most accurate? Explain.

2. Calculate the manufacturing overhead cost of the A Frame, using an actual costing system and departmental overhead rates based on labour hours for cutting and on machine hours for welding. Explain why cost drivers must be used with actual costing as well as with normal costing.
3. Which estimate of overhead costs is likely to be more accuratethat based on predetermined departmental rates or that based on actual departmental rates? Explain.