Question

Please answer the questions and provide the solution. Thank you!

Alex Rodriguez is a product manager. Historically, his product has been a mainstay for the firm, with per unit usage of material and labour staying at the same levels. However, the firm's accounting systems show that over the past five years, this product has become more expensive to make, even after adjusting for changes in the prices of materials and labour. This period is also the time over which the firm aggressively expanded into new product lines and markets. Alex provides you with the following data: Number of units made Labour hours per unit Overhead per unit 200,000 24 minutes/unit $8.40 Alex also informs you that under the current scheme, 70% of the firm's total overhead is allocated to his product. Required a. Calculate the firm's total overhead cost and the overhead rate. b. Suppose 50% of the overhead relates to labour, meaning that it is appropriate to use labour hours as the cost driver for this pool. An additional 30% relates to batch-level cost; Alex's product consumes 45% of all batch-level activities. Of the product-level costs (15% of total), only $100,000 is traceable to Alex's product and the remainder is traceable to other products. The remaining 5% represents facility-level overhead costs. Determine the overhead cost per unit for Alex's product, incorporating this additional information.

Answer 1

Solution

a)

Assuming that the information given above is relating to the Alex's product.

Total overhead cost relating to Alex's product (200000 units*$8.4) = $1680000

It is given that 70% of the firm's total overhead is allocated to his product, hence firm's total overhead cost

= $1680000/.7

= $ 2400000

overhead rate = $8.4/.7

= $12

b) Calculation of overhead cost per unit for Alex's product by using additional information

Particulars Amount(in $)

Labor cost($1680000*.5) 840000

Batch level cost( $2400000*.3*.45) 324000

Product level cost 100000

Total overhead cost 1264000

No of units   200000 units

Overhead cost per unit 6.32

Note: facility level activities are the activities that are performed for the benefit of production process as a whole and not related to any specific product , hence not included while calculating overhead cost for Alex's product.