Alpha Corp. prices its products at full cost plus 25 percent. The company has two support...
Alpha Corp. prices its products at full cost plus 25 percent. The company has two support departments and two producing departments. Budgeted costs and normal activity levels are as follows:
| Support Departments | Producing Departments | |||
| S1 | S2 | P1 | P2 | |
| Overhead costs | $15,000 | $27,000 | $250,000 | $200,000 |
| Square feet | 900 | 1,100 | 4,000 | 8,000 |
| Number of employees | 12 | 28 | 100 | 80 |
| Direct labor hours | - | - | 9,000 | 10,000 |
| Machine hours | - | - | 12,000 | 8,000 |
S1 Department's costs are allocated based on square feet, and S2
Department's costs are allocated based on number of
employees.
P1 Department uses direct labor hours to assign overhead costs to
products and P2 Department uses machine hours.
Alpha manufactures Product X, each unit of which requires 5 direct
labor hours in P1 Department and no time in P2 Department. Direct
materials per unit of Product X cost $200, and direct labor is $110
per unit.
Determine the selling price of Product X, if the direct method of
allocation is used and the company follows its usual pricing
policy.
a.$575.00
b.$325.00
c.$387.50
d.$460.50
Homework Answers
Calculation of overhead rate in Department P1
| Overhead costs | 250,000 |
| Support department S1 costs (15,000 x 4,000/12,000) | 5,000 |
| Support department S2 costs (27,000 x 100/180) | 15,000 |
| Total overheads (i) | 270,000 |
| Direct labor hours (ii) | 9,000 |
| Overhead rate per direct labor hour (i)/(ii) | $30 |
Determining the selling price of Product X
| Direct material | 200 |
| Direct labor | 110 |
| Production department P1 overheads (30 x 5) | 150 |
| Total cost | 460 |
| Margin (460 x 25%) | 115 |
| Selling price of product X | $575 |
Hence, correct option is (a)
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