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The Matthew Company uses a normal job-costing system at its Minneapolis plant. The plant has a machining department and an assem- bly department. Its job-costing system has two direct-cost categories (direct materials and direct manufac- turing labor) and two manufacturing overhead cost pools (the machining department overhead, allocated to jobs based on actual machine-hours, and the assembly department overhead, allocated to jobs based on actual direct manufacturing labor costs). The 2017 budget for the plant is as follows: $$\begin{array}{lcc} & \text { Machining Department } & \text { Assembly Department } \\ \hline \text { Manufacturing overhead } & \$ 1,500,000 & \$ 5,100,000 \\ \text { Direct manufacturing labor costs } & \$ 1,600,000 & \$ 3,000,000 \\ \text { Direct manufacturing labor-hours } & 120,000 & 280,000 \\ \text { Machine-hours } & 30,000 & 270,000 \end{array}$$ 1\. Present an overview diagram of Matthew's job-costing system. Compute the budgeted manufacturing overhead rate for each department. 2\. During February, the job-cost record for Job 494 contained the following: $$\begin{array}{lcc} & \text { Machining Department } & \text { Assembly Department } \\ \hline \text { Direct materials used } & \$ 42,000 & \$ 78,000 \\ \text { Direct manufacturing labor costs } & \$ 15,000 & \$ 19,000 \\ \text { Direct manufacturing labor-hours } & 1,100 & 1,300 \\ \text { Machine-hours } & 2,800 & 1,100 \end{array}$$ Compute the total manufacturing overhead costs allocated to Job 494. 3\. At the end of 2017 , the actual manufacturing overhead costs were \(\$ 1,800,000\) in machining and \(\$ 5,300,000\) in assembly. Assume that 33,000 actual machine-hours were used in machining and that actual direct manufacturing labor costs in assembly were \(\$ 3,200,000\). Compute the over- or underallocated manufacturing overhead for each department.

Step by step solution

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1. Overview Diagram and Budgeted Manufacturing Overhead Rate

First, let's compute the budgeted manufacturing overhead rate for each department: - Machining Department: Budgeted overhead: \(\$1,500,000\) Budgeted machine-hours: \(30,000\) Manufacturing overhead rate = \(\frac{\text{Budgeted overhead}}{\text{Budgeted machine-hours}} = \frac{1,500,000}{30,000} = \$50\) per machine-hour - Assembly Department: Budgeted overhead: \(\$5,100,000\) Budgeted direct manufacturing labor costs: \(\$3,000,000\) Manufacturing overhead rate = \(\frac{\text{Budgeted overhead}}{\text{Budgeted direct manufacturing labor costs}} = \frac{5,100,000}{3,000,000} = 1.70\) or \(170\%\) of direct manufacturing labor costs The overview diagram of Matthew's job-costing system would consist of two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (machining department overhead allocated based on actual machine-hours and assembly department overhead allocated based on actual direct manufacturing labor costs).

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2. Total Manufacturing Overhead Costs for Job 494

Now we will calculate the total manufacturing overhead costs allocated to Job 494: - Machining Department: Actual machine-hours: \(2,800\) Overhead cost = Actual machine-hours * Overhead rate = \(2,800 * \$50 = \$140,000\) - Assembly Department: Actual direct manufacturing labor costs: \(\$19,000\) Overhead cost = Actual direct manufacturing labor costs * Overhead rate = \(\$19,000 * 1.70 = \$32,300\) Total manufacturing overhead costs allocated to Job 494 = \(\$140,000 + \$32,300 = \$172,300\)

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3. Over- or Underallocated Manufacturing Overhead

We will now compute the over- or underallocated manufacturing overhead for each department at the end of 2017: - Machining Department: Actual overhead: \(\$1,800,000\) Actual machine-hours: \(33,000\) Allocated overhead = Actual machine-hours * Budgeted overhead rate = \(33,000 * \$50 = \$1,650,000\) Over- or underallocated overhead = Actual overhead - Allocated overhead = \(\$1,800,000 - \$1,650,000 = \$150,000\) (Overallocated) - Assembly Department: Actual overhead: \(\$5,300,000\) Actual direct manufacturing labor costs: \(\$3,200,000\) Allocated overhead = Actual direct manufacturing labor costs * Budgeted overhead rate = \(\$3,200,000 * 1.70 = \$5,440,000\) Over- or underallocated overhead = Actual overhead - Allocated overhead = \(\$5,300,000 - \$5,440,000 = -\$140,000\) (Underallocated) At the end of 2017, the machining department overallocated its manufacturing overhead by \(\$150,000\) while the assembly department underallocated its manufacturing overhead by \(\$140,000\).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Manufacturing Overhead

Manufacturing overhead refers to all the costs involved in the manufacturing process that cannot be directly traced to a specific product. These costs include indirect expenses such as utilities, depreciation, and maintenance of the factory equipment. At Matthew Company's Minneapolis plant, two cost pools are used: machining department overhead and assembly department overhead. Both are allocated based on specific allocation bases for each department.
Understanding manufacturing overhead is crucial because overhead costs can significantly affect the total production costs, hence impact pricing and profitability. In a job-costing system, it's vital to allocate these overheads accurately to ensure products are cost out properly, allowing seamless budgeting and forecasting.
To effectively allocate overhead, companies often use an overhead rate that distributes these costs across jobs or products based on some measure of activity, such as machine hours or labor costs.

Direct Manufacturing Labor

Direct manufacturing labor includes the wages and salaries of individuals directly involved in manufacturing products. This includes the workers in the machining and assembly departments of Matthew Company. Direct labor is one of the easiest costs to allocate because it can be directly traced back to specific jobs within the company's job-costing system.
For Matthew Company, labor plays a key role in determining the assembly department's overhead, as overhead is allocated based on actual direct labor costs. This means that any changes in labor hours directly influence how much overhead is assigned to each job.
Accurate tracking of direct labor is essential, not just for allocating costs correctly, but also for calculating the labor productivity and efficiency, which are important metrics for evaluating the manufacturing process's overall performance.

Machine Hours

Machine hours represent the total hours machines are in operation and are a crucial factor in many manufacturing settings. For companies like Matthew Company, the machining department's overhead costs are allocated based on actual machine hours used in production. This variable is selected because machine operations often drive overhead costs, such as electricity and maintenance.
Determining the number of machine hours required helps in planning machine usage, scheduling maintenance, and predicting future needs. It also plays a fundamental role in computing the machining department's overhead rate, which is crucial for cost accuracy in job-costing.
Knowing the machine hours per job also aids in providing where improvements are needed in the manufacturing process, contributing to better resource management and potential cost savings.

Budgeted Manufacturing Overhead Rate

The budgeted manufacturing overhead rate is a predetermined rate used to allocate estimated overhead costs to individual jobs. This rate is calculated by dividing the total budgeted overhead by the chosen allocation base, such as machine hours or direct labor costs, for each department within the manufacturing facility.
At Matthew Company, the machining department uses machine-hours as its allocation base, leading to a rate of $50 per machine-hour for budgeting purposes. Meanwhile, the assembly department preferences the direct labor costs, giving a rate of 170% of these costs. Each rate signifies how overhead will be applied to individual manufacturing jobs throughout the period.
Utilizing a budgeted rate helps smooth production costing by providing consistency and predictability over fluctuating head costs. It also guides managers in making decisions about pricing, budgeting, and controlling manufacturing expenses.