Question

Problem 12-18 Allocation to accomplish smoothing LO 12-1, 12-2, 12-3

Thornton Corporation estimated its overhead costs would be $23,500 per month except for January when it pays the $145,680 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $169,180 ($145,680 + $23,500). The company expected to use 7,600 direct labor hours per month except during July, August, and September when the company expected 9,600 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 3,800 units of product in each month except July, August, and September, in which it produced 4,800 units each month. Direct labor costs were $24.10 per unit, and direct materials costs were $10.80 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 $21.60 per unit.

Requirement A

Calculate a predetermined overhead rate based on direct labor hours. (Round your answer to 2 decimal places.)

Predetermined Overhead Rate

Per Labor Hour

Requirement B to D

Determine the total allocated overhead cost, the cost per unit of product and the selling price for the product for January, March, and August. Assume that the company desires to earn a gross margin of $21.60 per unit. (Do not round intermediate calculations. Round "Cost per unit" and "Price" to 2 decimal places.)

	January	March	August
Total Allocated Overhead Cost
Cost Per Unit
Price

Answer 1

Predetermined overhead rate = Estimated total overhead / Estimated direct labor hours

Predetermined overhead rate = $169,180+258,500 ($23,500*11) / 7,600*9+9,600*3

Predetermined overhead rate = $427,680 / 97,200 (68,400+28,800) = $4.4 per direct labor hour

Total allocated overhead cost:

January = 7,600*$4.4 = $33,440

March = 7,600*$4.4 = $33,440

August = 9,600*$4.4 = $42,240

Cost per unit and Selling price for the product:

	January	March	August
Direct material per unit	$10.80	$10.80	$10.80
Direct labor per unit	24.10	24,10	24,10
Overhead per unit	8.8 (33,440/3,800)	8.8 (33,440/3,800)	8.8 (42,240/4,800)
Cost per unit	$43.7	$43.7	$43.7
Gross margin per unit	21.60	21.60	21.60
Selling price per unit	$65.3	$65.3	$65.3