Noteperfect Ltd manufactures sheet music stands in two separate departments: Cutting and welding:
One of Noteperfect’s major products, the A Frame, has the following production requirements:
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 the 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.