Question

shaw company budgets total overhead cost of $3,040,000. the company allocates overhead cost based on 190,000 budgeted direct labor hours.

Answer 1

Shaw Company allocates overhead costs based on a budgeted total of $3,040,000, distributed over 190,000 budgeted direct labor hours. Therefore, the overhead allocation rate is $16 per direct labor hour.

Step-by-step explanation:

To determine the overhead allocation rate, divide the total budgeted overhead cost by the budgeted direct labor hours:

`\[ \text{Overhead Allocation Rate} = \frac{\text{Total Budgeted Overhead Cost}}{\text{Budgeted Direct Labor Hours}} \]`

Substituting the given values, the calculation is as follows:

`\[ \text{Overhead Allocation Rate} = \frac{\$3,040,000}{190,000 \text{ hours}} = \$16/\text{hour} \]`

This means that Shaw Company assigns $16 of overhead costs to each direct labor hour worked. This allocation method is common in manufacturing and helps distribute indirect costs more accurately by tying them to the actual hours of labor involved in production.

Understanding the overhead allocation rate is crucial for cost accounting, as it allows businesses to assign overhead costs to products or services based on their use of resources. In the case of Shaw Company, this rate enables them to allocate overhead costs proportionally to the number of direct labor hours incurred. This information aids in setting product prices, assessing profitability, and making informed decisions related to resource utilization.