The Shirt Company manufactures shirts in two departments: cutting and sewing. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are 200,000 and estimated direct labor hours are 100,000. In June, the company incurred 15,500 direct labor hours. 1) Compute the predetermined OH allocation rate.
2) Determine the amount of OH allocated in June. The estimated costs for the cutting dept are 259,600. They will be allocated based on direct labor hours, which are estimated to be 118,000 hours for the year. The estimated costs for the sewing department are 513,000. Those costs will be allocated based on machine hours, which are estimated to be 190,000 hours for the year. In June, the company incurred 7,000 direct labor hours in cutting and 13,000 machine hours in sewing.
3) Compute the predetermined OH allocation rates for each department.
4) Determine the total amount of OH allocated in June.

Answer and Explanation:

1. The computation of predetermined OH allocation rate is shown below:-

Predetermined OH allocation Rate = Estimated overhead cost ÷ Estimated Direct labor hours

= 200,000 ÷ 100,000

= 2

2. The computation of the amount of OH allocated in June is shown below:-

Amount of OH allocated in June = Actual Direct labor hours × Overhead allocation Rate

= 15,500 × 2

= 3,100

3. The computation of predetermined OH allocation rates for each department is shown below:-

Overhead allocation Rate Estimated overhead costs ÷ Estimated Direct labor hour

For Cutting Dept = 259,600 ÷ 118,000

= 2.2

For Sewing Dept = 513,000 ÷ 190,000

= 2.7

4. The computation of the total amount of OH allocated in June is shown below:-

Amount of overhead allocated in June

= Machine hours × Predetermined OH allocation rate

For Cutting Dept = 13,000 × 2.2

= 28,600

For Sewing Dept = 7,000 × 2.7

= 18,900

month 1 start amount =$3287.90 interest=(3287.90x0.0145/12)3.97 total to pay=$3291.81 paid =$1200 balance =$2,091.87

month 2 starting amount= $2,091.87 interest =$25.28 total to pay =$2117.15 paid =$1200 balance $917.15

month 3 starting amount =$917.15 interest =$11.08 total to pay =$928.23 paid =$928.23 balance =$0 total to pay 1200+1200+928.23 = $3328.23 it will take 3 months to pay a total of $3328.23