{"id":132,"date":"2021-01-26T22:12:15","date_gmt":"2021-01-26T22:12:15","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=132"},"modified":"2021-05-13T22:57:18","modified_gmt":"2021-05-13T22:57:18","slug":"establishing-multiple-overhead-rates","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/establishing-multiple-overhead-rates\/","title":{"raw":"Establishing Multiple Overhead Rates","rendered":"Establishing Multiple Overhead Rates"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Calculate predetermined overhead allocation rates by department<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1631 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13224319\/arno-senoner-ZT16YkAYueo-unsplash-226x300.jpg\" alt=\"Orange purse\" width=\"226\" height=\"300\" \/>Using departments as cost pools, we can allocate manufacturing overhead for each department using whatever driver makes sense for that cost pool.\r\n<h2>Assembly Department<\/h2>\r\nIn our example, the assembly department sees machine hours as the logical cost driver, because it is highly automated, the costs accumulated in the pool are mostly due to the machines (depreciation, repairs, and maintenance, etc.).\r\n\r\nBudgeted machine hours for the month of October were:\r\n\r\nBasic purses = 9 hours per purse x 3,200 purses = 28,800 total machine hours for basic\r\n\r\nDeluxe purses = 32.5 hours per purse x 560 purses = 18,200 total machine hours for deluxe\r\n\r\nTherefore, total machine hours = 28,800 + 18,200 = 47,000.\r\n\r\nThe total overhead cost in that pool is $141,000, according to the accounting records. Remember, these costs are the ones that can\u2019t be attributed directly to the product. They are things like facility rent, insurance, depreciation on equipment, repairs and maintenance, and supervisory salaries and wages.\r\n\r\nThe allocation rate for the assembly department would be the cost of that pool divided by the number of units of the cost driver (machine hours):\r\n\r\nCost pool \/ cost driver = rate\r\n\r\n$141,000 \/ 47,000 = $3 per machine hour.\r\n<h2>Finishing Department<\/h2>\r\nIn our example, the finishing department sees labor hours as the logical cost driver, because it is labor-intensive. In other words, the costs accumulated in the pool are mostly due to the hand labor done by skilled workers. However, instead of using hours worked, we have decided to use wages and benefits at $20 per hour. Remember that by using labor $, we would take into account the relative skill level of the employees, assuming that more skilled workers made more per hour. In this example though, we are assuming we pay all employees the same rate.\r\n\r\nBudgeted labor hours for the month of October were:\r\n\r\nBasic purses = 4.125 hours per purse x 3,200 purses = 13,200 total direct hours for basic\r\n\r\nDeluxe purses = 10 hours per purse x 560 purses = 5,600 total direct labor hours for deluxe\r\n\r\nTherefore, budgeted labor dollars for October were:\r\n\r\nBasic purses = 13,200 total direct hours X $20 per hour = $264,000 direct labor dollars for basic\r\n\r\nDeluxe purses = 5,600 total direct hours X $20 per hour = $112,000 direct labor dollars for deluxe\r\n\r\nTherefore, total direct labor dollars = $264,000 + $112,000 = $376,000.\r\n\r\nThe total overhead cost in that pool is $47,000 according to the accounting records. Remember, these costs are the ones that can\u2019t be attributed directly to the product. They are things like facility rent, insurance, supervisory salaries and wages, tools, and some minimal depreciation on equipment.\r\n\r\nThe allocation rate for the finishing department would be the cost of that pool divided by the number of units of the cost driver (labor $):\r\n\r\nCost pool \/ cost driver = rate\r\n\r\n$47,000 \/ $376,000 = $0.125 per machine hour.\r\n\r\nYou now have both the allocation rate for the assembly department, $3 per machine hour, and the finishing department of $0.125 per machine hour. In the next section, we\u2019ll use these to determine unit costs.\r\n\r\nBefore you apply the rates to the products to determine the cost of each unit, check your understanding of how to calculate departmental rates.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]218831[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Calculate predetermined overhead allocation rates by department<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1631 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13224319\/arno-senoner-ZT16YkAYueo-unsplash-226x300.jpg\" alt=\"Orange purse\" width=\"226\" height=\"300\" \/>Using departments as cost pools, we can allocate manufacturing overhead for each department using whatever driver makes sense for that cost pool.<\/p>\n<h2>Assembly Department<\/h2>\n<p>In our example, the assembly department sees machine hours as the logical cost driver, because it is highly automated, the costs accumulated in the pool are mostly due to the machines (depreciation, repairs, and maintenance, etc.).<\/p>\n<p>Budgeted machine hours for the month of October were:<\/p>\n<p>Basic purses = 9 hours per purse x 3,200 purses = 28,800 total machine hours for basic<\/p>\n<p>Deluxe purses = 32.5 hours per purse x 560 purses = 18,200 total machine hours for deluxe<\/p>\n<p>Therefore, total machine hours = 28,800 + 18,200 = 47,000.<\/p>\n<p>The total overhead cost in that pool is $141,000, according to the accounting records. Remember, these costs are the ones that can\u2019t be attributed directly to the product. They are things like facility rent, insurance, depreciation on equipment, repairs and maintenance, and supervisory salaries and wages.<\/p>\n<p>The allocation rate for the assembly department would be the cost of that pool divided by the number of units of the cost driver (machine hours):<\/p>\n<p>Cost pool \/ cost driver = rate<\/p>\n<p>$141,000 \/ 47,000 = $3 per machine hour.<\/p>\n<h2>Finishing Department<\/h2>\n<p>In our example, the finishing department sees labor hours as the logical cost driver, because it is labor-intensive. In other words, the costs accumulated in the pool are mostly due to the hand labor done by skilled workers. However, instead of using hours worked, we have decided to use wages and benefits at $20 per hour. Remember that by using labor $, we would take into account the relative skill level of the employees, assuming that more skilled workers made more per hour. In this example though, we are assuming we pay all employees the same rate.<\/p>\n<p>Budgeted labor hours for the month of October were:<\/p>\n<p>Basic purses = 4.125 hours per purse x 3,200 purses = 13,200 total direct hours for basic<\/p>\n<p>Deluxe purses = 10 hours per purse x 560 purses = 5,600 total direct labor hours for deluxe<\/p>\n<p>Therefore, budgeted labor dollars for October were:<\/p>\n<p>Basic purses = 13,200 total direct hours X $20 per hour = $264,000 direct labor dollars for basic<\/p>\n<p>Deluxe purses = 5,600 total direct hours X $20 per hour = $112,000 direct labor dollars for deluxe<\/p>\n<p>Therefore, total direct labor dollars = $264,000 + $112,000 = $376,000.<\/p>\n<p>The total overhead cost in that pool is $47,000 according to the accounting records. Remember, these costs are the ones that can\u2019t be attributed directly to the product. They are things like facility rent, insurance, supervisory salaries and wages, tools, and some minimal depreciation on equipment.<\/p>\n<p>The allocation rate for the finishing department would be the cost of that pool divided by the number of units of the cost driver (labor $):<\/p>\n<p>Cost pool \/ cost driver = rate<\/p>\n<p>$47,000 \/ $376,000 = $0.125 per machine hour.<\/p>\n<p>You now have both the allocation rate for the assembly department, $3 per machine hour, and the finishing department of $0.125 per machine hour. In the next section, we\u2019ll use these to determine unit costs.<\/p>\n<p>Before you apply the rates to the products to determine the cost of each unit, check your understanding of how to calculate departmental rates.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm218831\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=218831&theme=oea&iframe_resize_id=ohm218831\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-132\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Establishing Multiple Overhead Rates. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Purse. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/ZT16YkAYueo\">https:\/\/unsplash.com\/photos\/ZT16YkAYueo<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/pdm\">Public Domain: No Known Copyright<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Establishing Multiple Overhead Rates\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Purse\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/ZT16YkAYueo\",\"project\":\"\",\"license\":\"pd\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-132","chapter","type-chapter","status-publish","hentry"],"part":27,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/132","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":6,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/132\/revisions"}],"predecessor-version":[{"id":1642,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/132\/revisions\/1642"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/27"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/132\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=132"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=132"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=132"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=132"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}