Question

Rundle Rug Company makes two types of rugs, seasonal and all-purpose. Both types of rugs are handmade, but the seasonal rugs require significantly more labor because of their decorative designs. The annual number of rugs made and the labor hours required to make each type of rug follow: Number of rugs Number of direct labor hours Seasonal 1,240 116,000 All-Purpose 2,800 168,000 Totals 4,040 284,000 Required a. Assume that annual overhead costs total $62,480. Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug. b. Rundle automates the seasonal rug line, which results in a dramatic decline in labor usage and allows the company to make 1,240 rugs in only 13,000 hours. Rundle continues to make the all-purpose rugs the same way as before. The number of rugs made and the labor hours required to make them after automation follow: Number of rugs Number of direct labor hours Seasonal 1,240 13,000 All-Purpose 2,800 168,000 Totals 4,040 181,000 Overhead costs are expected to increase to $79,640 as a result of the automation. Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base.

Answer 1

a) Overhead rate = total overhead cost/no of labor hour
overhead rate = 62480/284000 = 0.22
types of product			allocated cost
seasonal (0.22*116000)			25520
all purpose (0.22*168000)			36960
b) overead rate = 79640/181000 = 0.44
types of product			allocated cost
seasonal (0.44*13000)			5720
all purpose (0.44*168000)			73920