Question

1 - Blue Ridge Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. The following table presents information about estimated overhead and direct labor hours.

	Overhead	Direct LaborHours (dlh)	Product
			A	B
Painting Dept.	$248,000	10,000 dlh	16 dlh	4 dlh
Finishing Dept.	72,000	10,000	4	16
Totals	$320,000	20,000 dlh	20 dlh	20 dlh
	========	==========	======	======

Determine the overhead from both production departments allocated to each unit of Product A if the company uses a multiple department rate system.

A - $396.80 per unit

B - $425.60 per unit

C - $320.00 per unit

D - $214.40 per unit

Answer 1

Concepts and reason

Cost: Cost is an inevitable component of any product. To determine the profit earned or to be earned by selling or manufacturing a product, the corresponding costs are required to be calculated. Based on the nature, the costs can be classified direct cost or indirect cost.

Direct costs refer to those costs which remain same at single unit level, however changes with the change in number of units. On the other hand, indirect costs are those costs which remains constant in totality, however changes at per unit level.

Overhead costs: Overhead costs are indirect cost necessary to carry out the manufacturing of any product (or rendering of any service). A business generally estimates its overhead cost at the beginning of a period; which it would be incurred while manufacturing the product. Overhead cost is charged to product using a predetermined rate.

Fundamentals

Predetermined rate: Predetermined rate of overhead means the rate at which the estimated overhead cost would be charged to a specific period or to a specific job. It is calculated by dividing the total estimated overhead cost by a predefined base; say, labor hours, machine hours etc.

Applied overhead: Overhead expense is applied on the basis of predetermined overhead to a particular product before the cost is incurred on the product.

Compute the predetermined overhead rate of Painting Dept. and Finishing Dept. based on the direct labor hours hours as shown below:

Determine the overhead allocated to each unit of Product A as shown below:

Ans:

The overhead from both production departments allocated to each unit of product A is $425.60 per unit.