Perreth Products manufactures its products in two separate departments machining
Perreth Products manufactures its products in two separate departments: machining and assembly. Total manufacturing overhead costs for the year are budgeted at \$1 million. Of this amount, the Machining Department incurs \$600,000 (primarily for machine operation and depreciation) while the Assembly Department incurs \$400,000. Perreth Products estimates that it will incur 4,000 machines hours (all in the Machining Department) and 12,500 direct labour hours (2,500 in the Machining Department and 10,000 in the Assembly Department) during the year.
Perreth 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:
Both Jobs 500 and 501 used \$1,000 of direct materials. Wages and benefits total \$25 per direct labour hour. Perreth Products prices its products at 110% of total manufacturing costs.
Requirements
1. Compute Perreth Products’ current plantwide overhead rate.
2. Compute refined departmental overhead rates.
3. Which job (Job 500 or Job 501) uses more of the company’s resources? Explain.
4. Compute the total amount of overhead allocated to each job if Perreth Products uses its current plantwide overhead rate.
5. Compute the total amount of overhead allocated to each job if Perreth Products uses departmental overhead rates.
6. Do both allocation systems accurately reflect the resources that each job used? Explain.
7. Compute the total manufacturing cost and sales price of each job using Perreth Products’ current plantwide overhead rate.
8. Based on the current (plantwide) allocation system, how much profit did Perreth Products thinkit earned on each job? Based on the departmental overhead rates and the sales price determined in Requirement 7, how much profit did it reallyearn on each job?
9. Compare and comment on the results you obtained in Requirements 7 and 8.
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