CHAPTER 13
DISCUSSION QUESTIONS
Q13-1. Departmental overhead rates are preferred department renders service to various
to a single rate because they improve the departments and is not directly associated
control of overhead by department heads with manufacturing operations. The nature of
responsible for controllable overhead, and the work done by a department determines
they increase the accuracy of product and whether it is a service or producing depart-
job costing when products or jobs move ment. Examples of producing departments
through various producing departments. are cutting, finishing, machining, mixing, and
Q13-2. Departmentalizing factory overhead is an refining. Examples of service departments
extension of methods used in establishing a are maintenance, medical, powerhouse,
single rate because (a) an application base purchasing, receiving, and cost accounting.
must be selected and estimated; (b) over- Q13-5. The kinds of departments established to
head estimates must be made; and (c) control and charge costs depend on (a) sim-
actual overhead must be accumulated and ilarity of a company’s operations, processes,
compared with applied overhead. These and machinery; (b) location of operations,
steps are required for each producing processes, and machinery; (c) responsibili-
department, whereas with a single rate, only ties for production and costs; (d) relationship
total factory data are necessary. of operations to flow of product; and (e)
Q13-3. The sum of departmental over- or underap- number of departments or work centers. The
plied overhead would be different. Every number of departments established
direct labor hour would have the same depends on the emphasis placed on cost
amount of applied overhead when a plant- control and on the development of overhead
wide overhead rate is used, assuming that rates.
the application base is direct labor hours. Q13-6. Physically different segments of a depart-
However, the use of departmental rates ment or cost pools for different kinds of costs
results in different amounts of applied over- within a department may be driven by activ-
head, depending on the labor hours in each ity bases that are quite different, thus calling
department and the individual departmental for the use of subdepartments for factory
overhead rates. For example, a firm with an overhead accumulation, application, and
overall rate of $2 would have $20,000 of analysis for each physical segment or cost
applied overhead for 10,000 hours; the pool.
same firm with departmental rates of $1 and Q13-7. No. A more correct method is the use of the
$3 for its two producing departments could plant asset records to compute departmen-
have more or less applied overhead, tal depreciation, property tax, and fire insur-
depending on the breakdown of labor hours ance charges, provided the records are
receiving the $1 and $3 overhead charge. sufficiently detailed for this purpose and the
The total cost of goods sold and total work involved is not too complex. Such a
inventory would also be different, because method would give proper recognition to the
departmental rates could cause different various depreciation rates used and fire
unit costs. Therefore, inventory and cost of insurance premiums paid because of vary-
goods sold would be influenced by products ing types of equipment.
sold or still on hand. This would not be the Q13-8. Factors involved in selecting the most equi-
case if a blanket rate were used. table rate for applying factory overhead
Q13-4. A producing department is directly con- include consideration of the nature of a
cerned with manufacturing products or department’s operations, the relationship of
doing work on various jobs. A service overhead elements to operations involved,
13-1
,13-2 Chapter 13
and any clerical difficulties arising through results. To make such comparisons, both
the use of a particular rate. types of overhead must be accumulated and
Q13-9. The several steps followed in establishing reported in the same manner. Since the com-
departmental factory overhead rates are: putation of overhead rates with required
(a) Estimating direct overhead of producing overhead estimates precedes the incurrence
departments and the direct costs of ser- and accumulation of actual overhead, the
vice departments. computation procedures determine the
(b) Preparing a factory survey for the pur- accounting for actual overhead.
pose of distributing indirect departmen- Q13-13. Departmental over- or underapplied over-
tal costs and service department costs. head is determined by comparing actual and
(c) Estimating and allocating indirect applied overhead.
departmental costs. Q13-14. If a complex product line is produced in a
(d) Distributing service department costs. nondepartmentalized factory or in a single
(e) Computing departmental factory over- department of a factory, one approach to
head rates. accurate product costing is to use multiple
Q13-10. The questions that must be resolved in overhead cost pools and multiple bases
allocating service department costs to bene- within a single responsibility center.
fiting departments include: Q13-15. Nonmanufacturing businesses (such as retail
(a) Determining which departments are stores, financial institutions, insurance
benefited. companies, educational institutions, and hos-
(b) Selecting an allocation base. pitals) should be divided into departments to
(c) Choosing the allocation method, i.e., budget and control costs. For example, a
direct, step, or simultaneous. retail store might be departmentalized as fol-
Q13-11. (a) Direct—No service department costs lows: administration, occupancy, sales pro-
are allocated to other service motion and advertising, purchasing, selling,
departments. and delivery. As in manufacturing busi-
(b) Step—Service department costs are nesses, departmental costs are prorated to
allocated in the order of the depart- revenue-producing sales departments by
ments serving the greatest number of using a charging or billing rate.
departments and receiving service from Departmentalization is particularly neces-
the smallest number, or in the order of sary for hospitals and educational institu-
the largest service department cost allo- tions, which must budget their costs on a
cated to other service departments. departmental basis to control costs and to
Once a service department’s costs have charge adequate cost recovering fees.
been allocated, no costs of other service Q13-16. Government agencies employ large numbers
departments are allocated to it. of people, and as they spend larger and
(c) Simultaneous—The full reciprocal inter- larger sums of tax money for various serv-
relationships of benefits among service ices, taxpayers are demanding more efficient
departments are considered. use of that money. Therefore, services should
The simultaneous method is the be rendered at the lowest cost with the great-
most accurate for product costing and est efficiency. Governmental activities should
for identifying total costs for operating be budgeted and their costs controlled on a
particular service departments. responsibility accounting basis. The effi-
However, this method is also the most ciency of services should be measured by
difficult to compute. using such units of measurement as per
Q13-12. Control of overhead is achieved by compar- capita, per mile, or per ton.
ing actual results with planned or estimated
,Chapter 13 13-3
EXERCISES
E13-1
Work in Process ............................................................. 33,310
Applied Factory Overhead—Department A
(17,000 × $.89*) ............................................... 15,130
Applied Factory Overhead—Department B
(18,000 × $1.016**) .......................................... 18,180
*$17,800 ÷ 20,000 = $.89
**$20,200 ÷ 20,000 = $1.01
E13-2
Departmental Overhead Columns General Ledger
General
Factory
Machining Painting Assembly Cost Pool Debit Credit
(a) Factory Overhead
Control.................. 1,500.00 600.00 600.00 300.00 3,000.00
Accumulated
Depr.—Buildings 3,000.00
(b) Factory Overhead
Control.................. 6,000.00 2,000.00 1,200.00 400.00 9,600.00
Accumulated
Depr.—Machinery 9,600.00
(c) Factory Overhead
Control.................. 550.00 203.33 170.00 76.67 1,000.00
Accrued Property
Tax Payable....... 1,000.00
(d) Factory Overhead
Control.................. 450.00 180.00 160.00 60.00 850.00
Accr. Worker’s
Compensation... 850.00
(e) Factory Overhead
Control.................. 600.00 60.00 90.00 750.00
Accrued Power
Payable.............. 750.00
(f) Factory Overhead
Control............... 900.00 360.00 360.00 180.00 1,800.00
Accounts Payable 1,800.00
(g) Factory Overhead
Control............... 1,800.00 2,300.00 410.00 4,510.00
Materials ........... 4,510.00
, 13-4 Chapter 13
E13-3
(1) P1 P2 S1 S2
Budgeted factory overhead.................. $410,000 $304,000 $100,000 $50,000
Department $1 distribution
(90/300, 210/300) .................................. 30,000 70,000 (100,000)
Department S2 distribution
(64/80, 16/80) .......................................... 40,000 10,000 (50,000)
Budgeted factory overhead.................. $480,000 $384,000
Machine hours ....................................... ÷ 64,000
Predetermined rate ............................... $7.50
Direct labor hours. ................................ ÷100,000
Predetermined rate ............................... 3.84
Job 437 overhead cost.
Department P1
(3 × $7.50) ......................................... $22.50
Department P2
(2 × $3.84) .......................................... 7.68
30.18
(2) Plant-wide predetermined factory overhead rate:
$864, 000
= $6.40 per DLH
135, 000 DLH
Job 437 overhead cost (3 × $6.40) .......................................... $19.20
CGA-Canada (adapted). Reprint with permission.
DISCUSSION QUESTIONS
Q13-1. Departmental overhead rates are preferred department renders service to various
to a single rate because they improve the departments and is not directly associated
control of overhead by department heads with manufacturing operations. The nature of
responsible for controllable overhead, and the work done by a department determines
they increase the accuracy of product and whether it is a service or producing depart-
job costing when products or jobs move ment. Examples of producing departments
through various producing departments. are cutting, finishing, machining, mixing, and
Q13-2. Departmentalizing factory overhead is an refining. Examples of service departments
extension of methods used in establishing a are maintenance, medical, powerhouse,
single rate because (a) an application base purchasing, receiving, and cost accounting.
must be selected and estimated; (b) over- Q13-5. The kinds of departments established to
head estimates must be made; and (c) control and charge costs depend on (a) sim-
actual overhead must be accumulated and ilarity of a company’s operations, processes,
compared with applied overhead. These and machinery; (b) location of operations,
steps are required for each producing processes, and machinery; (c) responsibili-
department, whereas with a single rate, only ties for production and costs; (d) relationship
total factory data are necessary. of operations to flow of product; and (e)
Q13-3. The sum of departmental over- or underap- number of departments or work centers. The
plied overhead would be different. Every number of departments established
direct labor hour would have the same depends on the emphasis placed on cost
amount of applied overhead when a plant- control and on the development of overhead
wide overhead rate is used, assuming that rates.
the application base is direct labor hours. Q13-6. Physically different segments of a depart-
However, the use of departmental rates ment or cost pools for different kinds of costs
results in different amounts of applied over- within a department may be driven by activ-
head, depending on the labor hours in each ity bases that are quite different, thus calling
department and the individual departmental for the use of subdepartments for factory
overhead rates. For example, a firm with an overhead accumulation, application, and
overall rate of $2 would have $20,000 of analysis for each physical segment or cost
applied overhead for 10,000 hours; the pool.
same firm with departmental rates of $1 and Q13-7. No. A more correct method is the use of the
$3 for its two producing departments could plant asset records to compute departmen-
have more or less applied overhead, tal depreciation, property tax, and fire insur-
depending on the breakdown of labor hours ance charges, provided the records are
receiving the $1 and $3 overhead charge. sufficiently detailed for this purpose and the
The total cost of goods sold and total work involved is not too complex. Such a
inventory would also be different, because method would give proper recognition to the
departmental rates could cause different various depreciation rates used and fire
unit costs. Therefore, inventory and cost of insurance premiums paid because of vary-
goods sold would be influenced by products ing types of equipment.
sold or still on hand. This would not be the Q13-8. Factors involved in selecting the most equi-
case if a blanket rate were used. table rate for applying factory overhead
Q13-4. A producing department is directly con- include consideration of the nature of a
cerned with manufacturing products or department’s operations, the relationship of
doing work on various jobs. A service overhead elements to operations involved,
13-1
,13-2 Chapter 13
and any clerical difficulties arising through results. To make such comparisons, both
the use of a particular rate. types of overhead must be accumulated and
Q13-9. The several steps followed in establishing reported in the same manner. Since the com-
departmental factory overhead rates are: putation of overhead rates with required
(a) Estimating direct overhead of producing overhead estimates precedes the incurrence
departments and the direct costs of ser- and accumulation of actual overhead, the
vice departments. computation procedures determine the
(b) Preparing a factory survey for the pur- accounting for actual overhead.
pose of distributing indirect departmen- Q13-13. Departmental over- or underapplied over-
tal costs and service department costs. head is determined by comparing actual and
(c) Estimating and allocating indirect applied overhead.
departmental costs. Q13-14. If a complex product line is produced in a
(d) Distributing service department costs. nondepartmentalized factory or in a single
(e) Computing departmental factory over- department of a factory, one approach to
head rates. accurate product costing is to use multiple
Q13-10. The questions that must be resolved in overhead cost pools and multiple bases
allocating service department costs to bene- within a single responsibility center.
fiting departments include: Q13-15. Nonmanufacturing businesses (such as retail
(a) Determining which departments are stores, financial institutions, insurance
benefited. companies, educational institutions, and hos-
(b) Selecting an allocation base. pitals) should be divided into departments to
(c) Choosing the allocation method, i.e., budget and control costs. For example, a
direct, step, or simultaneous. retail store might be departmentalized as fol-
Q13-11. (a) Direct—No service department costs lows: administration, occupancy, sales pro-
are allocated to other service motion and advertising, purchasing, selling,
departments. and delivery. As in manufacturing busi-
(b) Step—Service department costs are nesses, departmental costs are prorated to
allocated in the order of the depart- revenue-producing sales departments by
ments serving the greatest number of using a charging or billing rate.
departments and receiving service from Departmentalization is particularly neces-
the smallest number, or in the order of sary for hospitals and educational institu-
the largest service department cost allo- tions, which must budget their costs on a
cated to other service departments. departmental basis to control costs and to
Once a service department’s costs have charge adequate cost recovering fees.
been allocated, no costs of other service Q13-16. Government agencies employ large numbers
departments are allocated to it. of people, and as they spend larger and
(c) Simultaneous—The full reciprocal inter- larger sums of tax money for various serv-
relationships of benefits among service ices, taxpayers are demanding more efficient
departments are considered. use of that money. Therefore, services should
The simultaneous method is the be rendered at the lowest cost with the great-
most accurate for product costing and est efficiency. Governmental activities should
for identifying total costs for operating be budgeted and their costs controlled on a
particular service departments. responsibility accounting basis. The effi-
However, this method is also the most ciency of services should be measured by
difficult to compute. using such units of measurement as per
Q13-12. Control of overhead is achieved by compar- capita, per mile, or per ton.
ing actual results with planned or estimated
,Chapter 13 13-3
EXERCISES
E13-1
Work in Process ............................................................. 33,310
Applied Factory Overhead—Department A
(17,000 × $.89*) ............................................... 15,130
Applied Factory Overhead—Department B
(18,000 × $1.016**) .......................................... 18,180
*$17,800 ÷ 20,000 = $.89
**$20,200 ÷ 20,000 = $1.01
E13-2
Departmental Overhead Columns General Ledger
General
Factory
Machining Painting Assembly Cost Pool Debit Credit
(a) Factory Overhead
Control.................. 1,500.00 600.00 600.00 300.00 3,000.00
Accumulated
Depr.—Buildings 3,000.00
(b) Factory Overhead
Control.................. 6,000.00 2,000.00 1,200.00 400.00 9,600.00
Accumulated
Depr.—Machinery 9,600.00
(c) Factory Overhead
Control.................. 550.00 203.33 170.00 76.67 1,000.00
Accrued Property
Tax Payable....... 1,000.00
(d) Factory Overhead
Control.................. 450.00 180.00 160.00 60.00 850.00
Accr. Worker’s
Compensation... 850.00
(e) Factory Overhead
Control.................. 600.00 60.00 90.00 750.00
Accrued Power
Payable.............. 750.00
(f) Factory Overhead
Control............... 900.00 360.00 360.00 180.00 1,800.00
Accounts Payable 1,800.00
(g) Factory Overhead
Control............... 1,800.00 2,300.00 410.00 4,510.00
Materials ........... 4,510.00
, 13-4 Chapter 13
E13-3
(1) P1 P2 S1 S2
Budgeted factory overhead.................. $410,000 $304,000 $100,000 $50,000
Department $1 distribution
(90/300, 210/300) .................................. 30,000 70,000 (100,000)
Department S2 distribution
(64/80, 16/80) .......................................... 40,000 10,000 (50,000)
Budgeted factory overhead.................. $480,000 $384,000
Machine hours ....................................... ÷ 64,000
Predetermined rate ............................... $7.50
Direct labor hours. ................................ ÷100,000
Predetermined rate ............................... 3.84
Job 437 overhead cost.
Department P1
(3 × $7.50) ......................................... $22.50
Department P2
(2 × $3.84) .......................................... 7.68
30.18
(2) Plant-wide predetermined factory overhead rate:
$864, 000
= $6.40 per DLH
135, 000 DLH
Job 437 overhead cost (3 × $6.40) .......................................... $19.20
CGA-Canada (adapted). Reprint with permission.
