Question

Rivera Company manufactured two products, A and B, during April. For purposes of product costing, an overhead rate of $2.00 per direct-labor hour was used, based on budgeted annual factory overhead of $500,000 and 250,000 budgeted annual direct-labor hours, as follows:

Budgeted Overhead Budgeted Hours
Department 1 $300,000 200,000
Department 2 200,000 50,000
$500,000 250,000

The number of labor hours required to manufacture each of these products was:

Product A Product B
In Department 1 3 1
In Department 2 1 3
Total 4 4

During April, production units for products A and B were 1,000 and 3,000, respectively.

Required:
a. Using a plantwide overhead rate, what are total overhead costs assigned to products A and B, respectively?
b. Using departmental overhead rates, what are total overhead costs assigned to products A and B, respectively?
c. Assume that materials and labor costs per unit of Product B are $10 and that the selling price is established by adding 40% of total costs to cover profit and selling and administrative expenses.What difference in selling price would result from the use of departmental overhead rates?

Answer 1

a). The assigned total cost is :

`$A =\$ \ 8000$`

`$B =\$ \ 24,000$`

Total overheads $ 500,000

Total hours 250,000

Plantwide overhead rate $ 2

Cost assigned to :

A ( 2 x 4 x 1000) $ 8,000

B ( 2 x 4 x 3000) $ 24,000

b). Department 1 Department 2

Overheads $ 300,000 $ 200,000

Hours 200,000 50,000

Overhead rate $ 1.50 $ 4.00

Overheads for the product A $ 8,500

(1.5 x 3 + 4 x 1) x 1000

Overheads for the product B $ 40,500

(1.5 x 3 + 4 x 1) x 3000

c). Plant wide Departmental

material and labor $ 10 $ 10

overheads $ 8 $ 13.50

Total $ 18.00 $ 23.50

Add: profit $ 7.20 $ 9.40

Selling price $ 25.20 $ 32.90

The difference $ 7.70

Therefore, the increase in the selling price = $ 7.70