Question

Question:The Santos Shirt Company manufactures shirts in two departments: Cutting and Sewing. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are\(500,000, and estimated direct labor hours are 200,000. In June, the company incurred 17,500 direct labor hours.

1. Compute the predetermined overhead allocation rate.

2. Determine the amount of overhead allocated in June.

The Santos Shirt Company has refined its allocation system by separating manufacturing overhead costs into two cost pools—one for each department. The estimated costs for the Cutting Department are \)200,000. They will be allocated based on directlabor hours, which are estimated to be 125,000 hours for the year. The estimated costs for the Sewing Department are $300,000.Those costs will be allocated based on machine hours, which are estimated to be 150,000 hours for the year. In June, the companyincurred 10,000 direct labor hours in Cutting and 12,500 machine hours in Sewing.

3. Compute the predetermined overhead allocation rates for each department.

4. Determine the total amount of overhead allocated in June.

Short answer

Using the Single allocation method

Plant-wide Overhead rate:$2.5

June’s Overhead cost:$43,750

Using the departmental allocation method

Overhead rate for cutting department:$1.6

Overhead cost or sewing department:$2

June’s Overhead cost:$43,750

Total Cost:$41,000

Step-by-step solution

Step-by-Step-SolutionStep1: Computation of single plantwide overhead allocation rate

$$\begin{gathered} Singleplantwideoverheadallocationrate=\frac{TotalIndirectcost}{Totaldirectlaborhour} \\ =\frac{\$500,000}{200,000} \\ =\$2.5 \end{gathered}$$

Computation of June’s overhead cost

$$\begin{gathered} June\text{'}soverheadCost=\mathbf{Singleplantwideoverheadallocationrate}\mathbf{\times }\mathbf{DirectlaborhourinJune} \\ =\$2.5\times 17,500 \\ =\$43,750 \end{gathered}$$

Computation of predetermined overhead allocation rate

$$\begin{gathered} Forcuttingdepartment=\frac{TotalIndirectcost}{Totaldirectlaborhour} \\ =\frac{\$200,000}{125,000} \\ =\$1.6 \\ ForSwingDeprtment=\frac{TotalIndirectcost}{Totalmachinehour} \\ =\frac{\$300,000}{150,000} \\ =\$2 \end{gathered}$$

Computation of June’s overhead cost

$$\begin{gathered} CuttingCost=Predeterminedoverheadallocationrate\times DirectlaborhourinJune \\ =\$1.6\times 10,000 \\ =\$16,000 \\ SewingCost=Predeterminedoverheadallocationrate\times MachinehourinJune \\ =\$2\times 12,500 \\ =\$25,000 \\ TotalCost=Cuttingcost+Sewingcost \\ =\$16,000+\$25,000 \\ =\$41,000 \end{gathered}$$