Problem 4-25 – Departmental overhead rates and job order
costing
Frameworks
Artisans creates hand-painted picture frames.
The frames are cast from resin in an automated process. Once the casting is done, talented artisans
hand-paint one of fifteen designs on each frame. In the final assembly process, a worker
inserts the glass pane and attaches the backing to the frame. Frameworks’ budget for the current year,
along with the production requirements for two of the frames it produces, are
as follows:
Department
Casting Painting Assembly
Direct
labor hours – 60,000 12,000
Machine
hours 28,000 – 800
Manufacturing
overhead cost $2,52,000
$2,76,000 $48,000
Seasons
of Fun Frame Department
Casting Painting Assembly
Direct
labor hours – 0.5 0.10
Machine
hours 1 – 0.05
Birth
Announcement Frame Department
Casting Painting Assembly
Direct
labor hours – 1 0.20
Machine
hours 0.5 – 0.05
Required
a. Assume
that Frameworks Artisans uses a single predetermined overhead application rate
based on direct labor hours. Calculate
the rate for the current year.
b. Using the
rate you calculated in part (a) and the production requirements given,
calculate the amount of overhead applied to a Seasons of Fun frame and a Birth
Announcement frame.
c. Frameworks
Artisans’ accountant has been taking a course in managerial accounting and has
just learned that overhead should be applied using a causal base. She believes that direct labor hours may not
be the best application base for the company and wants to explore the use of
machine hours instead. Calculate the
predetermined overhead application rate for the year using machine hours as the
base. Using this rate, calculate the
amount of overhead applied to a Seasons of Fun frame and a Birth Announcement
frame.
d. The
accountant has attended to a few more classes and now wants to explore the use
of departmental predetermined overhead rates.
She has decided that machine hours is the best overhead application base
for the casting department and direct labor hours is the best base for the
painting and assembly departments. Do
you support her choice of an overhead application base? Why? Calculate the predetermined overhead
application rate for each of the three departments using the selected base.
e. Using the
departmental overhead application rates developed in part (d), calculate the
amount of overhead applied to a Seasons of Fun frame and a Birth Announcement
frame.
f. Compare
the levels of overhead applied to a Seasons of Fun frame and a Birth
Announcement frame under the three different overhead application methods. Which method is best? Why?
