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Frogs, Inc. Part #2 Using Departmental Overhead Rates

Goal: To compare plantwide and departmental overhead allocation methods.

Information: Frogs, Inc. computes manufacturing overhead using either direct labor hours or direct material dollars so the owners decided to reject the parking lot project at this time. However, based on your training and education, you are sure that the company has made a mistake and should have accepted the new job.

You have decided to explain the benefits of switching to the departmental method using separate rates for all four departments using last years data and comparing these cost analysis with the plantwide rates already shown. You want to explain the benefits of accepting this new job to the owners.

The following table represents information about the four departments numbers from last year: Department Information

	Concrete Casting	Design Department	Engineering	Owners
Projects per year	1,000 frog statues	200	200	200
Direct materials	$62,000	$10,000	$900,000	$1,000
Direct Labor Costs	5 Casters $208,000	6 Designers $436,800	3 Sr. and 5 Jr. $447,200	2 Owners $187,200
Direct Labor Hours	10,400	12,480	16,640	4,160
Totals for the year	$270,000	$446,800	$1,377,200	$188,200

All projects use both the Design Department and the Engineering Departments in addition to the Concrete Casting Department and the Owners work. All employees including the owners work the standard 2,080 hours each year. The total direct labor hours for the year are 43,680.

Frogs, Inc. Page 5 of 13

	Design Department	Engineering Department	Concrete Casting	Owners
Overhead Costs
Setup Costs	$20,000	$60,000	$10,000	$3,000
Utilities	$10,000	$15,000	$5,000	$3,000
Equipment Fees	$0	$100,000	$5,000	$5,000
Permits	$5,000	$5,000	$0	$5,000
Travel to job site	$5,000	$20,000	$3,000	$5,000
Total	$40,000	$200,000	$23,000	$21,000

Required:

1 Compare and contrast the plantwide method with the departmental method of computing manufacturing overhead rates.

2 Compute the overhead cost per unit using direct labor hours as the plantwide cost driver.

3 Compute the overhead cost per unit using the departmental method. Use the projects per year as the cost driver for the Design Department and the Owners. Use the number of

concrete frogs made for the Concrete Casting Department and the direct labor hours for

the Engineering Department. You will have 4 department rates.

4 Using your department rates for each department computed in question 3 and the DM and

DL costs computed in Part 1, calculate the total cost of the project.

5 Now, compute the overhead rates using the POHR for direct material dollars used ($0.70)

for Concrete Casting. Compute the POHRs for the Design Department, the Engineering

Department, and the Owners using direct labor hours as the cost driver.

6 Using your department rates for each department computed in question 5 and the costs

computed in Part 1, calculate the total cost of the project.

7 What cost drivers do you think best represent the most accurate overhead rates for this

job? Explain your answers for all 4 departments.

8 At this point, would you accept or reject the job after using this new information?

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