Question

Applied Overhead and Unit Overhead Cost: Plantwide Rates

Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year:

Estimated overhead	$2,040,000
Expected activity	51,000
Actual activity (direct labor hours):
Deluxe dryer	10,000
Regular dryer	41,000
Units produced:
Deluxe dryer	20,000
Regular dryer	205,000

Required:

1. Calculate the predetermined plantwide overhead rate, using direct labor hours.
$ _____per hour

Calculate the applied overhead for each product, using direct labor hours.

	Applied overhead
Deluxe	$
Regular	$

2. Calculate the overhead cost per unit for each product. If required, round your answers to the nearest cent.

	Overhead Cost
Deluxe	$___ per unit
Regular	$ __per unit

3. What if the deluxe product used 20,000 hours (to produce 20,000 units) instead of 10,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 20,000 units are sold.

Profits would _______ by $_____

Answer 1

1.

Predetermined plant wide overhead rate = Estimated overhead/Estimated direct labor hours

= $2,040,000/51,000

= $40 per direct labor hour

	Applied overhead (Actual direct labor hours x Predetermined plant wide overhead rate)
Deluxe	10,000 x 40 = $400,000
Regular	41,000 x 40 = $1,640,000

2.

	Overhead Cost (Applied overhead/Number of units produced)
Deluxe	400,000/20,000 = $20 per unit
Regular	1,640,000/205,000 = $8 per unit

3.

Overhead applied to Deluxe = Actual direct labor hours x Predetermined plant wide overhead rate

= 20,000 x 40

= $800,000

In this case, overhead applied to Deluxe would increase by $400,000 (800,000 - 400,000) and hence Profits would decrease by $400,000

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