Question

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? 1-b. Compute the total amount of overhead cost that would be applied to each product. 2. Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $816,000 assigned to Product H and $816,000 assigned to Product L. If this suggestion is followed, how much overhead cost per unit would be assigned to each product?

Answer 1

Answer and Explanation:

1. a. The computation of the total amount of overhead cost is shown below:-

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

= $1632000 ÷ ((40,000 units × 0.4) + (8,000 units × 0.4))

= $1,632,000 ÷ 19,200 direct labor hours

= $85

Particulars Product H Product L

Overhead cost per unit $34.00 $34.00

($85 × 0.4)

b. The computation of the total amount of overhead cost is shown below:-

Particulars Product H Product L Total

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

(Number of units × overhead cost per unit)

c. The computation of overhead cost per unit would be assigned to each product is shown below:-

Particulars Product H Product L

Overhead cost $816,000 $816,000

Number of units 40,000 8,000

Overhead cost per unit $20.40 $102.00

So, for determining the overhead cost per unit we simply divide the overhead cost by the number of units.