Allocating overhead costs among products
Nevin Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following.
Factory manager’s salary | $260,000 |
Factory utility cost | 121,000 |
Factory supplies | 56,000 |
Total overhead costs | $437,000 |
Nevin uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows.
Cups | 420 hours |
Tablecloths | 740 |
Bottles | 1,140 |
Total machine hours | 2,300 |
Required
a. Allocate the budgeted overhead costs to the products.
b. Provide a possible explanation as to why Nevin chose machine hours, instead of labor hours, as the allocation base.
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