Question

Mollie Schlue started Mollie’s Magnets seven years ago. This small company creates special-order magnets with varying logos and designs, and for different purposes. Mollie estimates her overhead costs to be $12,000 per month. In addition, she expects employees to work 2,000 hours, and there are usually 1,500 machine hours in a given month. Mollie’s Magnets has two departments. The assembly department gives rise to 1,800 of the labor hours, and the finishing department requires 1,200 of the machine hours. The $12,000 in overhead is allocated as follows: $9,000 is traced to the assembly department and $3,000 is traced to the finishing department. During January, the following jobs were completed:


Required
A. What is the company’s plantwide predetermined overhead rate using direct labor hours as the base?
B. What is the company’s plantwide predetermined overhead rate using machine hours as the base?
C. How much overhead would be applied to each job if direct labor hours were used as the cost driver for overhead?
D. How much overhead would be applied to each job if machine hours were used as the cost driver for overhead?
E. If Mollie’s Magnets decided to use department overhead rates, what would the overhead rates be for each department? The assembly department allocates overhead based on direct labor hours and the finishing department allocates overhead based on machine hours.
F. Explain why it is important for Mollie’s company to use departmental rates as opposed to a single plantwide rate to allocate overheadcosts.


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  • CreatedMarch 11, 2015
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