Question

Finch Corporation estimated its overhead costs would be $23,700 per month except for January when it pays the $169,830 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $193,530 ($169,830 + $23,700). The company expected to use 7,200 direct labor hours per month except during July, August, and September when the company expected 9,300 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 3,600 units of product in each month except July, August, and September, in which it produced 4,650 units each month. Direct labor costs were $24.00 per unit, and direct materials costs were $11.40 per unit.

Required

1. Calculate a predetermined overhead rate based on direct labor hours.

2. Determine the total allocated overhead cost for January, March, and August.

3. Determine the cost per unit of product for January, March, and August.

4. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $21.10 per unit.

Answer 1

Answer:

A)	The pre-determined overhead rate should be for the whole year.
	Total estimated overhead = 23,700*12+169,830 =	$       454,230
	Total estimated direct labor hours = 7200*9+9300*3 =	92,700	DLH
	Pre-determined OH rate = 454,230/92,700 =	$              4.90
B)		January	March	August
	Number of units produced	3,600	3,600	4,650
	Direct labor hours worked	7,200	7,200	9,300
	Total overhead allocated at $4.90 per hour	$35,280	$35,280	$45,570
C)
	Material cost at $11.40	41,040	41,040	53,010
	Labor cost at $24.00	172,800	172,800	223,200
	Overhead allocated	35,280	35,280	45,570
	Total cost of production	249,120	249,120	321,780
	Cost per unit	$           69.20	$         69.20	$      69.20
D)	Selling price = Cost per unit+$21.10 =	$           90.30	$         90.30	$      90.30