Question

Pacifica Industrial Products Corporation makes two products, Product H and Product L. Product H is expected to sell 40,000 units next year and Product L is expected to sell 8,000 units. A unit of either product requires 0.4 direct labor-hours. The company's total manufacturing overhead for the year is expected to be $1,632,000.

Required: 1-a. The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product?
Product H Product L
Overhead cost per unit
1-b. Compute the total amount of overhead cost that would be applied to each product
Product H Product L Total
Total overhead cost

Answer 1

1a. Product H Overhead cost per unit = [$85 * 0.4] = $34.00

Product L Overhead cost per unit = [$85 * 0.4] = $34.00

Predetermined overhead application rate = Estimated total manufacturing overheads / Total direct Labor hours

Predetermined overhead application rate = $1632000 / {[40000 units * 0.4]+[8000 units * 0.4]}

Predetermined overhead application rate = $1632000 / 19200 direct labor hours

Predetermined overhead application rate = $85 per direct labor hour

1b. Product H Product L

Overhead cost $816,000 $816,000

/No.of units 40000 8000

Overhead cost per unit $20.40 $102.00

Product H Product L Total

Total Overhead cost $1,360,000 $272,000 $1,632,000

Note:

Total Overhead cost = No.of units * Overhead cost per unit