Plantwide Versus Department Allocations of Overhead:

San Juan 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 labor hours worked in all departments are expected to total 40,000 (used for the plantwide rate). The Cutting department expects to use 20,000 machine hours, the Assembly department expects to use 25,000 direct labor hours, and the Finishing department expects to incur $100,000 in direct labor costs (this information will be used for department rates).

Required:

a. Assume San Juan 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.

b. Assume San Juan Company uses the plantwide approach for allocating overhead costs and direct labor hours as the allocation base. Calculate the predetermined overhead rate, and explain how this rate will be used to allocate overhead costs.