Johnsons noted that the current cost accounting system assigned all overhead to

Question

Johnsons noted that the current cost accounting system assigned all overhead to products based on direct labor hours using a predetermoned overhead rate.
K1 K4 K7
Monthly direct labor hours 2,000 400 100
Monthly nmachine hours 800 2,400 12,800
Monthly allocated overhead costs $80,000 $16,000 $4,000

a) Using the data gathered by Johnson, caculate the predetermined OH rate based on direct labor hours.
b) Find the predetermined OH rate per machine hour that would allocate the current total amount of overhead ($100,00) to the three product lines.
c) Johnson believes the current overhead allocations is distorting the profitability of the product lines: determine the amount of overhead that would be allocated to each product line if machne hours were the basis of overhead allocation.

Explanation / Answer

a) pre-determined overh head rate on basis of labour hour :
= total over head cost / level of activity for example : k1 = $80000/2000 labour hours =$40 remain as follows.. k1 k4 k7 pre -determined O.H rate $40 $40 $40 k1 k4 k7 pre -determined O.H rate $40 $40 $40 for example : k1 = $80000/800 machine hours =$100 remain as follows.. k1 k4 k7 pre -determined O.H rate $100 $6.7 $0.3 current over head $10000 allocated as per machine hour basis to the products. for example : k1 = $10000/[800+2400+12800 hours] = $0.625 = 800*0.625 = $500 remaining as follows.. remaining as follows.. k1 k4 k7 over head allocation to products 500 1500 8000 c) on the basis of "Machine hour " the total over head allocation: example for k1 = [over head + currentntly allocated over head ] / machine hours = [$80000 + $500 ] / 800 hours = $100.625 remaining as follows.. k1 k4 k7 pre -determined O.H rate 100.625 7.292 0.938 k1 k4 k7 pre -determined O.H rate $40 $40 $40

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