Question

Rivera Company manufactured two products, A and B, during April. For purposes of product costing, an overhead rate of $2.94 per direct-labor hour was used, based on budgeted annual factory overhead of $735,000 and 250,000 budgeted annual direct-labor hours, as follows: Department 1. Department 2 Budgeted Overhead Budgeted Hours $420,000 175,000 315,000 75,000 $735,000 250,000 The average number of labor hours required to manufacture one unit of each of these products was: Product B In Department 1 In Department 2 Total Product A 2 3 - 2 During April, production units for products A and B were 2,000 and 3,000, respectively. Required: (1) Using a plantwide overhead rate, what are total overhead costs assigned to products A and B, respectively? (2) Using departmental overhead rates, what are total overhead costs assigned to products A and B, respectively? (3) Assume that materials and labor costs per unit of Product B are $12 and that the selling price is established by adding 40% of total costs to cover profit and selling and administrative expenses. What difference in selling price would result from the use of departmental overhead rates?

Answer 1

1.Using Plantwide rate
	A	B
Number of units	2,000	3,000
Hours per unit	5	5
Total Hours	10,000	15,000
Overhead rate	2.94	2.94
Total overhead costs assigned	29,400	44,100
Departmental rates
	Department 1	Department 2
Budgeted Overheads	420000	315000
Budgeted Hours	175000	75000
Predetermined Rate	2.4	4.2
	A	B
Number of units	2,000	3,000
Total Hours in Department 1	4,000	9,000
Total Hours in Department 2	6,000	6,000
Overhead assigned
Department 1	9,600	21,600
Department 2	25,200	25,200
Total overhead costs assigned	34,800	46,800
Difference in Selling price = Difference in overhead cost + 40%	3,780.0
i.e.	1.26	per unit