Question

Rundle Hats Corporation manufactures three different models of hats: Vogue, Beauty, and Glamour. Rundle expects to incur $644,000 of overhead cost during the next fiscal year. Other budget information follows.

		Vogue		Beauty		Glamour		Total
Direct labor hours		4,200		6,200		3,600		14,000
Machine hours		2,000		2,200		2,240		6,440

Required

1. Use direct labor hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product.

2. Use machine hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product.

Answer 1

Ans. 1	Step 1 : Calculations of Allocation rate :
	Allocation rate = Total Estimated overhead cost / Total direct labor hours
		$644,000 / 14,000
		$46.00	per direct labor - hour
	Step 2 : Calculations of Budgeted overhead cost for each product :
	Product	Direct labor hours (a)	Allocation rate (b)	Budgeted cost (a*b)
	Vogue	4200	$46.00	$193,200
	Beauty	6200	$46.00	$285,200
	Glamour	3600	$46.00	$165,600
Ans. 2	Step 1 : Calculations of Allocation rate :
	Predetermined overhead rate = Total Estimated overhead cost / Estimated machine hours
		$644,000 / 6,440
		$100.00	per machine - hour
	Step 2 : Calculations of Budgeted overhead cost for each product :
	Product	Machine hours (a)	Allocation rate (b)	Budgeted cost (a*b)
	Vogue	2000	$100.00	$200,000
	Beauty	2200	$100.00	$220,000
	Glamour	2240	$100.00	$224,000