(a) determine the overhead cost per unit for each product. Jay Krue makes two pr
ID: 2418296 • Letter: #
Question
(a)
determine the overhead cost per unit for each product.
Jay Krue makes two products, Simple and Complex. As their names suggest, Simple is the more basic product, and Complex comes with all the bells and whistles. The company has always allocated overhead costs to products based on machine hours. Last year, the company implemented an activity-based costing system, and managers determined the following activity pools and rates based on total overhead of $1,408,000:Rate Assembly $1.25 per direct labor hour Fabrication $9.75 per machine hour Setups $18 per batch Bonding $85,200 direct to Complex
Only the Complex product requires bonding, so all the costs of bonding should be allocated to Complex. The following data relate to both products.
Simple Complex Units produced 127,000 50,000 Direct labor hours 231,000 101,000 Machine hours 50,000 30,000 Batches 2,300 4,800
Explanation / Answer
a. 1. Under the traditional method, the overhead costs will be allocated on the basis of machine hours.
Total overhead = $1,408,000
Machine hours of Simple = 50,000. Machine hours of complex = 30,000. Total machine hours = 50,000+30,000 = 80,000.
Overhead allocated to Simple = machine hours of simple/Total machine hours*total overhead
= 50,000/80,000*1,408,000 = $880,000
Overhead allocated to Complex = machine hours of complex/Total machine hours*total overhead
= 30,000/80,000*1,408,000 = $528,000
2. Overhead cost of simple+overhead cost of complex = 880,000+528,000 = 1,408,000 = total company overhead. Thus, the overhead assigned to each product sums to the total company overhead.
3. Overhead cost per unit of Simple = overhead allocated to Simple/number of units produced = 880,000/127,000 = $6.93 per unit
Overhead cost per unit of Complex = overhead allocated to Complex/number of units produced = 528,000/50,000 = $10.56 per unit
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