Question

Cornerstone Exercise 4.1 (Algorithmic)
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	$1,710,000
Expected activity	45,000
Actual activity (direct labor hours):
Deluxe dryer	9,000
Regular dryer	36,000
Units produced:
Deluxe dryer	18,000
Regular dryer	180,000

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 18,000 hours (to produce 18,000 units) instead of 9,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 18,000 units are sold.

Answer 1

1. Calculation of Predetermined Plantwide Overhead Rate on basis of Direct Labour Hours Direct Labour Hrs (Actual Activity) Estimated Overhead- Predetermined Plantwide Overhead Rate Estimated Overhead/Allocation Base 45,000 $1,710,000.00 $1,710,000/45,000 $38.00 Per DLH Calculation of Applied Overhead for each Product: Predetermined Overhead Rate $38 per DLH Deluxe Regular Direct Labor Hours Used (a) Overhead Rate per hour (b) Applied Overhead (a) x (b) 36,000 $38.00 $342,000.00 $1,368,000.00 9,000 $38.00 2. Calculation of the Overhead Cost Per Unit for each Product: Deluxe Regular Total Overhead Cost Applied (a) Number Of Units Produced (b) Overhead Cost Per Unit (a)/(b) $342,000.00 $1,368,000.00 180,000 S7.60 18,000 $19.00

3. If Deluxe Product used 18,000 hours to produce 18,000 units instead of 9,000 hours At 18,000 Hours At 9,000 Hours Overhead Rate Per Hour (a) Number Of Hours Used (b) Applied Overhead Cost (a) x (b) Number of Units Produced (d) Overhead Cost Per Unit O/(d) $38.00 9,000 $684,000.00 $342,000.00 18,000 $38.00$19.00 $38.00 18,000 18,000 there will be increase in Unit Overhead Cost from $19 to $38 (doubled) resulting Reduction in Profit by $38-$19 $19 per Unit and $19 x 18,000 units-$342000 in total