37) Credit Valley Products manufactures its products in two separate departments: milling and assembly. Total manufacturing overhead costs for the year are budgeted at $1,600,000. Of this amount Milling Department incurs $960,000 (primarily for machine operation and depreciation) while the Assembly Department incurs $640,000. Credit Valley Products estimates that it will incur 8,000 machines hours (all in the Milling Department) and 25,000 direct labour hours (5,000 in the Milling Department and 20,000 in the Assembly Department) during the year.
Credit Valley Products currently uses a plant-wide 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 Milling 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 400 and 401 in each production department:
|
Milling Department
|
Assembly department
|
Job 600
|
6 MH
4 DL hours
|
12 DL hours
|
Job 601
|
12 MH
4 DL hours
|
12 DL hours
|
Both Jobs 400 and 401 used $4,000 of direct materials. Wages and benefits total $35 per direct labour hour. Credit Valley Products prices its products at 120% of total manufacturing costs.
Required:
1. Compute Credit Valley Products' current plant-wide overhead rate.
2. Compute refined departmental overhead rates.
3. Compute the total amount of overhead allocated to each job if Credit Valley Products uses its current plant-wide overhead rate.
4. Compute the total amount of overhead allocated to each job if Credit Valley Products uses departmental overhead rates.
5. Do both allocation systems accurately reflect the resources that each job used? Explain.
6. Compute the total manufacturing cost and sales price of each job using Credit Valley Products' current plant-wide overhead rate.
7. Compute the total manufacturing cost and sales price of each job using Credit Valley Products' refined departmental overhead rates
8. Based on the current (plant-wide) allocation system, how much profit did Credit Valley Products think it earned on each job?
9.Based on the departmental overhead rates and the sales price determined in Requirement 7, how much profit did it really earn on each job?