Machining		Assembly
	Department		Department
Job 500. . . .	10	MH	12 DL hours
	2	DL hours
Job 501. . . .	20	MH	12 DL hours
	2	DL hours

Walters

Products manufactures its products in two separate departments: machining and assembly. Total manufacturing overhead costs for the year are budgeted at

$1.06

million. Of this amount, the Machining Department incurs

$620,000

(primarily for machine operation and depreciation) while the Assembly Department incurs

$440,000.

Walters

Products estimates it will incur

8,000

machine hours (all in the Machining Department) and

15,500

direct labour hours

(4,500

in the Machining Department and

11,000

in the Assembly Department) during the year.

Walters

Products currently uses a plantwide overhead rate based on direct labour hours to allocate overhead. However, the company is considering refining its overhead allocation system by using departmental overhead rates. The Machining Department would allocate its overhead using machine hours (MH), but the Assembly Department would allocate its overhead using direct labour (DL) hours.

The following chart shows the machine hours (MH) and direct labour (DL) hours incurred by Jobs 500 and 501 in each production department:

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(Click the icon to view the machine hours and direct labour hours incurred by each department.)

Both Jobs 500 and 501 used

$2,800

of direct materials. Wages and benefits total

$40

per direct labour hour.

Walters

Products prices its products at

110%

of total manufacturing costs.

Requirements

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Question content area bottom

Part 1

Requirement 1. Compute

Walters

Products' current plantwide overhead rate.

Begin by determining the formula, then compute the rate. (Round your answer to the nearest whole dollar.)

/

=

Plantwide overhead rate

Part 2

/

=

per DL hour

Part 3

Requirement 2. Compute refined departmental overhead rates.

Determining the formula, then compute the rate. (Round your answers to the nearest dollar.)

/

=

Department allocation rate

Part 4

Machining		/			=		/machine hour
Assembly		/			=		/DL hour

Part 5

Requirement 3. Which job (Job 500 or Job 501) uses more of the company's resources? Explain.

Job 500 uses more

Job 501 uses more

of the company's resources.

Part 6

Job 500 uses

less DL hours than

more DL hours than

the same number of DL hours as

Job 501.

Job 500 uses more

Job 501 uses more

machine hours than the other job. The accounting system should show that one job actually

"costs" the company more labour than

"costs" the company more resources than

"costs" the company the same amount of resources as

the other.

Part 7

Requirement 4. Compute the total amount of overhead allocated to each job if

Walters

Products uses its current plantwide overhead rate.

	Job 500	Job 501
Total direct labour hours
x Plantwide allocation rate
Overhead allocation

Part 8

Requirement 5. Compute the total amount of overhead allocated to each job if

Walters

Products uses departmental overhead rates.

	Job 500	Job 501
Overhead allocation - Machining Department
Overhead allocation - Assembly Department
Total overhead allocation

Part 9

Requirement 6. Do both of the allocation systems accurately reflect the resources that each job used? Explain.

The single plantwide overhead rate assigned

different amounts

the same amount

of overhead to both jobs. The departmental rates assign

less overhead cost

more overhead cost

to Job 501 than Job 500 due to the

extra assembly hours

extra direct labour hours

extra machine hours

used. This seems

"fairer"

"less fair"

.

Part 10

Requirement 7. Compute the total manufacturing cost and sales price of each job using

Walters

Products' current plantwide overhead rate. (Round amounts to the nearest dollar. Enter the percentage as a whole number.)

	Job 500	Job 501
Direct materials
Direct labour
Manufacturing overhead
Total manufacturing costs
Markup for pricing (%)
Sales price

Part 11

Requirement 8. Based on the current (plantwide) allocation system, how much profit did

Walters

Products think it earned on each job? Based on the departmental overhead rates and the sales price determined in Requirement 7, how much profit did it really earn on each job?

Calculate the gross profit using the current costing system.

	Job 500	Job 501
Sales price
Less: Total manufacturing costs
Gross profit / (loss)

Part 12

Based on the departmental overhead rates and the sales price determined in Requirement 7, how much profit did the company really earn on each job?

Calculate the gross profit using the departmental rate costing system. (Use parentheses or a minus sign to show losses.)

	Job 500		Job 501
Sales price
Less: Total manufacturing costs:
Direct materials
Direct labour
Manufacturing overhead
Gross profit / (loss)

Part 13

Requirement 9. Compare and comment on the results you obtained in Requirements 7 and 8.

When utilizing a single rate allocation method,

Walters

believes that

both jobs are equally profitable

Job 500 is profitable but Job 501 shows a loss

Job 501 is profitable but Job 500 shows a loss

.

When utilizing a refined costing method,

Walters

realizes that

both jobs are equally profitable

Job 500 is profitable but Job 501 shows a loss

Job 501 is profitable but Job 500 shows a loss

.