Rising Past Pty Ltd manufactures a complete line of fibreglass attaché cases and suitcases. The firm has three manufacturing departments: Moulding, Component and Assembly. There are also two support departments: Power and Maintenance. The sides of the cases are manufactured in the Moulding Department. The frames, hinges and locks are manufactured in the Component Department. The cases are completed in the Assembly Department. Varying amounts of materials and time are required to manufacture each type of case.
Rising Fast has always used a plantwide overhead rate. Direct labour hours are used to assign overhead to products. The predetermined overhead rate is calculated by dividing the company’s total ring estimated overhead by the total estimated direct labour hours to be worked in the three manufacture departments.
Liam Bolt, manager of cost accounting, has recommended that Rising Fast use departmental overhead rates. The planned operating costs and expected levels of activity for the coming year have been developed by Bolt and are presented by department in the following schedules. (All numbers are in thousands.)
1. (a) Calculate the plantwide overhead rate for Rising Fast for the coming year using the same method as used in the past.
(b) Estimate the overhead cost of an Elite attaché case that requires 4 direct labour hours and 5 machine hours in the Moulding Department. 3 direct labour hours in the Component Department and 2 direct labour hours in the Assembly Department.
2. Liam Bolt has been asked to develop departmental overhead rates for comparison with the plantwide rate. The following steps are to be followed in developing the departmental rates:
(a) Allocate the total Maintenance Department costs to the three manufacturing departments, using the direct method.
(b) Allocate the Power Department costs to the three manufacturing departments, using the direct method.
(c) Calculate departmental overhead rates for the three manufacturing departments, using a machine hour cost driver for the Moulding Department and a direct labour hour cost driver for the Component and Assembly departments.
3. Estimate the overhead cost of the Elite attaché case using the departmental overhead.
4. Should Rising Fast use a plantwide rate or departmental rates to assign overhead to produce? Explain your answer.