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plantwide predetermined OH rate

Red River Farm Machine makes a wide variety of products, all of which must be processed in the cutting and Assembly departments. For the year 2010, Red River budgeted total overhead of $993,000, of which $385,500 will be incurred in cutting and the remainder will be incurred in Assembly. Budgeted direct labor and machine hours are as follows:

Cutting Assembly

Budgeted direct labor hours 27,000 3,000
Budgeted machine hours 2,100 65,800

Two products made by Red River are the RW22SKI and the SD45ROW. The following cost and production time information on these items has been gathered:


Direct material $34.85 $19.57
Direct labor rate in cutting $20.00 $20.00
Direct labor rate in assembly $ 8.00 $ 8.00
Direct labor hours in cutting $ 6.00 4.80
Direct labor hours in assembly $ 0.03 0.05
Machine hours in cutting $ 0.06 0.15
Machine hours in assembly $5.90 9.30

A. What is the plantwide predetermined OH rate based on (1) direct labor hours and (2) machine hours for the upcoming year? Round all computations to the nearest cent.

B. What are the departmental predetermined OH rates in Cutting and Assembly using the most appropriate base in each department? Round all computations to the nearest cent.

C. What are the costs of products RW22SKI and SD45ROW using (1) a plantwide rate based on direct labor hours, (2) a plantwide rate based on machine hours, and (3) departmental rates calculated in part (b)?

D A competitor manufactures a product that is extremely similar to RW22SKI and sells each unit of it for $310. Discuss how Red River's management might be influenced by the impact of the different product costs calculated in part (c)

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Solution Summary

The plantwide predetermined OH rate is computed.