Plant-wide Versus Department Allocations of Overhead.
Lopez Company expects to incur $600,000 in overhead costs this coming year$100,000 in the Cutting department, $300,000 in the Assembly department, and $200,000 in the Finishing department. Direct labour hours worked in all departments are expected to total 30,000 (this information will be used for the plant-wide rate). The Cutting department expects to use 20,000 machine hours, the Assembly department expects to use 25,000 direct labour hours, and the Finishing department expects to incur $100,000 in direct labour costs (this information will be used for department rates).

Required:

a. Assume Lopez Company uses the plant-wide approach for allocating overhead costs and direct labour hours as the allocation base. Calculate the predetermined overhead rate, and explain how this rate will be used to allocate overhead costs.

b. Assume Lopez Company uses the department approach for allocating overhead costs. Calculate the predetermined overhead rate for each department, and explain how these rates will be used to allocate overhead costs