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Hello, my question is from textbook Management Accounting, 8th edition, by Langfield-Smith, Smith, Andon, Hilton, Thorne, Chapter 7, Overhead costs.

Noteperfect Ltd manufactures sheet music stands in two separate departments, cutting and welding. The following data relate to the year just ended:

  Cutting Department Welding Department  Total plant
Budgeted manufacturing overhead $60,000 $120,000 $180,000
Actual manufacturing overhead 54,000 108,000 162,000
Budgeted machine hours 24,000 96,000 120,000
Actual machine hours 27,000 90,000 117,000
Budgeted direct labour hours 30,000 15,000 45,000
Actual direct labour hours 29,400 11,700 41,000

 

One of Noteperfect's major products, the A frame, has the following production requirements:

Product "A" frame

  Cutting department Welding department Total plant
Machine hours 2.5 4.0 6.5
Direct labour hours 4.0 1.0 5.0
       

Required:

1. Calculate the manufacturing overhead cost of the A frame using:

a). a predetermined plantwide rate based on direct labour hours

b). a predetermined plantwide rate based on machine hours

c). predetermined departmental rates based on direct labour hours for the cutting department and on machine hours for the welding department.

Which of these three estimates of overhead cost is likely to be most accurate? Explain.

 

2. Calculate the manufacturing overhead cost of the A frame, using an actual costing system and departmental overhead rates based on labour hours for cutting and on machine hours for welding. Explain why cost drivers must be used with actual costing as well as with normal costing.

 

3. Which estimate of overhead costs is likely to be more accurate - that based on predetermined departmental rates or that based on actual departmental rates? Explain. 

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