Reference no: EM133342618

Allocation of OH Costs - Waterfall, Ltd.; Background information

Waterfall, Ltd. manufactures custom basketball jerseys for professional basketball teams. The firm uses two departments to manufacture these jerseys: the Cutting Department and the Sewing Department.

The firm assigns direct material costs and direct labor costs directly to each team's order. All other costs, such as depreciation of factory equipment, factory utilities, supervisor salaries, etc. are treated as overhead costs that cannot be directly traced to team orders and are assigned to each order using a predetermined overhead rate. Currently, Waterfall uses one single plantwide predetermined overhead rate, based on direct labor hours (DLh) to assign overhead costs to team orders.

As an alternative, the accountant for Waterfall has proposed using two predetermined overhead rates to assign overhead costs to team orders: the Cutting Department, which is more automated, would use Machine Hours (Mh) to assign overhead costs to orders. The Sewing Department, would use Direct Labor hours (DLh) to assign overhead costs to orders.

The first set of data shown below is based on estimates that were made at the beginning of 2022 for the expected total output for the firm during the year. The second set of data shown below relates to one specific team order that was started, completed, and sold during 2022: the jersey order for the Manchester Bees team.

	Cutting Department	Sewing Department	Total
Estimated total Direct Labor hours (DLh)	12,000	51,000	63,000
Estimated total Machine hours (Mh)	19,500	3,900	23,400
Estimated Variable OH	$150,000	$259,000	$409,000
Estimated Fixed OH	$825,000	$404,000	$1,229,000

Manchester Bees order:
	Cutting Department	Sewing Department	Total
Direct materials	$240	$30	$270
Direct labor	$30	$345	$375
Actual Direct Labor hours (DLh) used	3	22	25
Actual Machine hours (Mh) used	4	2	6

Question 1. Assuming Waterfall sticks with their current system and only uses one predetermined overhead rate based on direct labor hours (DLh), calculate the amount of overhead costs that would be applied to the Manchester Bees order.

Question 2. Assuming Waterfall follows their accountant's suggestion and calculates two overhead rates (using Machine Hours for the Cutting Department and Direct Labor hours for the Sewing Department), calculate the amount of overhead costs that would be applied to the Manchester Bees order.