Question

The normal production volume is 120,000 units; each unit requires 5 direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead for the coming year is as follows:

Line Item: FOH
Amount: $2,160,000*
Line Item: VOH
Amount: $1,440,000

Answer 1

The question involves calculating the overhead rate based on direct labor hours for a manufacturing process and understanding economies of scale in production. The student must allocate budgeted fixed and variable overhead costs across the total direct labor hours to determine the cost per hour.

Step-by-step explanation:

The student's question pertains to the application of overhead costs in a manufacturing environment based on direct labor hours. With a normal production volume of 120,000 units and each unit requiring 5 direct labor hours, we can calculate the predetermined overhead rate for both fixed overhead (FOH) and variable overhead (VOH). The budgeted fixed overhead is $2,160,000 and the budgeted variable overhead is $1,440,000. To determine the overhead applied per direct labor hour, we would divide each overhead type by the total direct labor hours (120,000 units x 5 hours/unit).

Given information about the economics of scale shows that production plants with different outputs have various average costs of production. This concept illustrates how output level affects the average cost and can bring about cost savings for larger production volumes up to a certain point. The reference to spreading the overhead relates to the method of allocating fixed costs over a larger number of units to reduce the average fixed cost per unit.