A Overhead allocation rate
Last year Overhead Cost = $21 million
Last year Direct labor cost = $15 million
Overhead allocation rate = 21 million/15 million = $1.4 per labor cost
B Overhead allocation rate
Last year Overhead Cost = $10 million
Last year Direct labor cost = $15 million
Overhead allocation rate = 10 million/15 million = $0.67 per labor cost
C Overhead allocation rate
Last year Overhead Cost = $10 million
Last year Direct labor cost = $15 million
Last year Direct Cost = $11 million
Overhead allocation rate = 10 million/(15 million + 11 million) = $0.38 per direct cost
D
875 | 876 | ||
Method 1 | Direct Professional labor | 20,000 | 20,000 |
Overhead Cost @1.4 per labor cost | 28,000 | 28,000 | |
Total Cost | 48,000 | 48,000 | |
method 2 | Direct Professional labor | 20,000 | 20,000 |
Overhead cost @0.67 per labor cost | 13,333 | 13,333 | |
Other Direct Cost | 2,000 | 6,000 | |
Total Cost | 35,333 | 39,333 | |
Method 3 | Direct Professional Labor | 20,000 | 20,000 |
Other direct cost | 2,000 | 6,000 | |
Total direct cost | 22,000 | 26,000 | |
Overhead cost @0.38 per direct cost | 8,360 | 9,880 | |
Total Cost | 30,360 | 35,880 | |
E The Overhead allocation rate derived from three methods are on different basis. Thus, the total cost derived is different.
In Method 1, All the overheads are allocated on the basis of direct professional labor cost.
In method 2, Overheads excluding direct cost are allocated on the basis of direct professional labor cost.
In method 2, Overheads excluding direct cost are allocated on the basis of total direct cost.
F When direct cost can can be easily identified for each job then, it should not be allocated on the basis of any factor. Rather direct cost pertaining to each job should be allocated to its respective job. So, the method 1 is inappropriate.
G IN method 2 and method 3, direct cost other than professional labor cost is not allocated n the basis of direct professional labor cost. So the method 2 and method 3 are better than method 1.
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