Question

Bates Company makes two products. Product X requires 6,000 hours of labor, and Product Y requires 4,000 hours of labor. Bates undertook an automation program that reduced the consumption of labor required by Product X to only 2,000 hours of labor. Product Y was not affected by the automation process. Overhead cost prior to the automation totaled $10,000. After automation, overhead cost amounted to $24,000. Assuming Bates uses direct labor hours as a company-wide allocation base before and after the automation, the amount of overhead cost allocated to:

Multiple Choice

a-product X would be $4,000 prior to automation and $16,000 after automation.

b-product X would be $6,000 prior to automation and $16,000 after automation.

c-product Y would be $8,000 prior to automation and $8,000 after automation.

d-product Y would be $4,000 prior to automation and $16,000 after automation.

Answer 1

Solution:

Predetermined overhead rate prior to automation = Estimated overhead / Estimated direct labor hours

= $10,000 / 10000 = $1 per hour

Overhead allocated to product X prior to automation = 6000*$1 = $6,000

Overhead allocated to product Y prior to automation = 4000*$1 = $4,000

Predetermined overhead rate after automation = Estimated overhead / Estimated direct labor hours

= $24,000 / 6000 = $4 per hour

Overhead allocated to product X after automation = 2000*$4 = $8,000

Overhead allocated to product Y after automation = 4000*$4 = $16,000

Hence option d "product Y would be $4,000 prior to automation and $16,000 after automation." is correct.