Question

3 Great Outdoors Company makes two types of camping tents. Making a standard camping tent requires 4 hours of labor while making a deluxe camping tent requires 10 hours of labor. During the most recent accounting period the company made 2,900 standard camping tents and 1.400 deluxe camping tents. Indirect manufacturing costs amounted to $563,200 and are allocated based on labor hours. Based on this information: 4 points 8 00.56.54 Multiple Choice $22 of overhead cost should be allocated to each camping tent regardless of the type of tent made. $114.4 of overhead cost should be allocated to each camping tent regardless of the type of tent made $88 of overhead cost should be assigned to each standard camping tent and $220 of overhead cost should be assigned to each deluxe tent. None of the answers are correct

Answer 1

The correct answer is

(c) $88 of overhead cost should be assigned to each standard camping tent and $ 220 of overhead cost should be assigned to each luxury tent.

Explanation:

Option (a) and Option (b) cannot be correct as type of tent made cannot be ignored because of the labour hour required for each of them varies significantly.

Option (c) should be used as it allocates the cost on the basis of labour hours used in production of each tent, I.e.,

Product	Production (tents)	Labour hours required	Total labour hours required
Standard camping tent	2900	4 hours	11,600
Luxury tent	1400	10 hours	14,000
Total			25,600

Indirect manufacturing cost to be allocated on the basis of labour hours used:

Standard camping tent = $563,200 * 11600 hours = $ 255,200

                                                                  25600 hours

Luxury tent = $563,200 * 14000 hours = $308,000

                                              25600 hours

Indirect manufacturing cost per unit :

Standard camping tent = $ 255,200 = $ 88 per unit

                                              2900 units  

Luxury tent = $308,000 = $ 220 per unit

                         1400 units