3. The bulk of the labor cost on the Koopers job is in the Assembly De-
partment, which incurs very little overhead cost. The department has an
overhead rate of only 30% of direct labor cost as compared to much
higher rates in the other two departments. Therefore, as shown above,
use of departmental overhead rates results in a relatively small amount
of overhead cost being charged to the job.
Use of a plantwide overhead rate in effect redistributes overhead costs
proportionately between the three departments (at 140% of direct labor
cost) and results in a large amount of overhead cost being charged to
the Koopers job, as shown in Part 1. This may explain why the company
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Solutions Manual, Chapter 3 121
Problem 3-30 (continued)
bid too high and lost the job. Too much overhead cost was assigned to
the job for the kind of work being done on the job in the plant.
On jobs that require a large amount of labor in the Fabricating or Ma-
chining Departments the opposite will be true, and the company will
tend to charge too little overhead cost to the jobs if a plantwide over-
head rate is being used. The reason is that the plantwide overhead rate
(140%) is much lower than the rates would be if these departments
were considered separately.
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