Question

Problem 12-18A (Algo) Allocation to accomplish smoothing LO 12-1, 12-2, 12-3 Stuart Corporation estimated its overhead costs would be $22,200 per month except for January when it pays the $218,100 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $240,300 ($218,100 + $22,200). The company expected to use 7,700 direct labor hours per month except during July, August, and September when the company expected 9,200 hours of direct labor each month to build inventories for high demand that normally occurs during the Christmas season. The company’s actual direct labor hours were the same as the estimated hours. The company made 3,850 units of product in each month except July, August, and September, in which it produced 4,600 units each month. Direct labor costs were $25.00 per unit, and direct materials costs were $11.80 per unit. Required Calculate a predetermined overhead rate based on direct labor hours. Determine the total allocated overhead cost for January, March, and August. Determine the cost per unit of product for January, March, and August. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $20.40 per unit.

Answer 1

(a) Calculation of predetermined overhead rate based on direct labor hours:

Predetermined Overhead rate = Total manufacturing overheads / Estimated direct labor hours

January overhead costs Feb - Dec overhead costs (22,200 x 11) Total manufacturing overhead costs (1) July - Sep hours (9,200 x 3) Labor hours for other months (7,700 x 9) Total direct labor hours (ii) Predetermined overhead rate (i/ii) $ 240,300 $ 244,200 $ 484,500 27,600 69,300 96,900 $ 5

$\therefore$ The predetermined overhead rate = $5 per hour

(b) Determination of total allocated overhead costs for January, March and August:

January March August Direct labor hours (i) 7,700 7,700 9,200 Predetermined overhead rate (ii) $ 5$ 5$ 5 Overhead allocated [(iii) = (i*ii)] $38,500 $38,500 $ 46,000 No. of units produced (iv) 3,850 3,850 4,600 Overhead cost per unit (iii/iv) $ 10 $ 10 $ 10

(c) Determination of cost per unit of product for January, March, and August:

January March August Direct material cost per unit $ 11.80 $ 11.80 $ 11.80 Direct labor cost per unit $ 25.00 $ 25.00 $ 25.00 Overhead cost per unit $ 10.00 $ 10.00 $ 10.00 Total cost per unit $ 46.80 $ 46.80 $ 46.80

(d) Determination of selling price for the product, assuming that the company desires to earn a gross margin of $20.40 per unit:

January March August Total cost per unit $ 46.80 $ 46.80 $ 46.80 Gross margin per unit $ 20.40 $ 20.40 $ 20.40 Selling price $ 67.20 $ 67.20 $ 67.20