Question

Rivera Company manufactured two products, A and B, during April. For purposes of product costing, an overhead rate of $6.00 per direct-labor hour was used, based on budgeted annual factory overhead of $900,000 and 150,000 budgeted annual direct-labor hours, as follows:

Budgeted Overhead Budgeted Hours

Department 1 $600,000 120,000

Department 2    $300,000 30,000

$900,000 150,000

The number of labor hours required to manufacture each of these products was:

Product A Product B

In Department 1 1 2

Department 2 3 1

Total 4 3

During April, production units for products A and B were 3,000 and 2,500, respectively. Required:

(1) Using a plant-wide 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 $15 and that the selling price is established by adding 40% of total product 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 a plant-wide overhead rate, what are total overhead costs assigned to products A and B
	Department 1 =$6*120000 hours
	Department 2 = $6*30000 hours
2)	Using departmental overhead rates, what are the total overhead costs assigned to products A and B, respectively?
	Departmental overhead rate
	Department 1 =$600000/120000 hours
	Department 2 = $300000/30000
	Assigned to product A & B
	Product A
	= number of units produced * [(dept 1 overhead rate * department 1 labor hours per unit ) + (dept 2 overhead rate * department 2 labor hours per unit)]
	= 3000 units * [($5*1)+($10*3)]
	=3000*35
	=$105000
	Product B
	=2500 units *[($5*2)+($10*1)]
	=2500 units *$20
	=$50000
3)
			Product A	Product B
	Material & labor		$          15	$          15
	Overhead Per unit		$          35	$          20
	Total Cost Per Unit		$          50	$          35
	Add:
	Profit 40%		$          20	$          14
	Selling price		$          70	$          49
	The difference in selling price due to overhead cost = $70-49
	=$21