Question

The monthly indirect production cost is Depreciation Expense on Assembly Equipment of $100,000. The cost allocation base is number of machine hours. The expected level of production in a month is 10,000 machine hours. What is the amount of indirect production cost per unit assigned to Product 1 and Product 2. Product 1 requires 10 machine hours per unit. Product 2 requires 20 machine hours per unit.

Answer 1

Product 1 $100

Product 2 $200

Step-by-step explanation:

Indirect production costs are those costs which is not directly attributable to specific product / service. These costs are other than the direct material and direct labor cost.

First of all we will calculate the Indirect overhead allocation rate per machine hour.

Indirect production cost allocation rate = Indirect production cost / Level of Production

Indirect production cost allocation rate = $100,000 / 10,000 machine hours = $10 per machine hour

Now we will allocate this cost to each unit

Indirect production cost = Indirect production cost allocation rate x Numbers of hours per unit

Product 1 = $10 per machine hour x 10 machine hours per unit = $100 per unit

Product 2 = $10 per machine hour x 20 machine hours per unit = $200 per unit