exercise 4-6A allocating overhead cost amoung products Cain Company makes three
ID: 2492876 • Letter: E
Question
exercise 4-6A allocating overhead cost amoung products Cain Company makes three products in its factory: plastic cups, plastic tablecloths , and plastic bottles. The expected overhead cost for the next fiscal year include the fallowing factory managers salary $175,000 Factory utility cost 64,000 factory supplies 11,000 total overheard costs $250,000 Cain uses machine hours as the cost driver to allocate overhead cost budgeted machine hours for the products are as fallows cups 200 Hours Tablecloths 600 Bottles 800 Total machine hours 1600 Required a) Allocate the budgeted overhead costs to the products. b) Provide a possible explanation as to why cain chose machine hours , instead of labor hours as the allocation base.
Explanation / Answer
a.
Total overhead costs = $250,000
Total machine hours = 1,600 machine hours
Overhead allocation rate = Total overhead costs/Total machine hours = $250,000/$1,600 machine hours = $156.25 per machine hours
Allocation of overhead costs:
Product
Machine hours
Allocation rate
Allocated overhead costs
Plastic cups
200
$156.25
$31,250.00
Plastic tablecloths
600
$156.25
$93,750.00
Plastic Bottles
800
$156.25
$1,25,000.00
$2,50,000.00
b.
Selection of allocation base for allocation of overhead costs involves selecting the factor which provides reasonable and fair allocation. Cain company may have chosen machine hours over labor hours because some of the workers may work on more than one product .For example, one laborer might make bottles and tablecloths as opposed to just bottles. By choosing machine hours, we can know exactly how many hours were put in to making each product and thus, the allocation rate would be fair. Also, it may be the case that the some products do not require much manual intervention and some may require more of it.
Product
Machine hours
Allocation rate
Allocated overhead costs
Plastic cups
200
$156.25
$31,250.00
Plastic tablecloths
600
$156.25
$93,750.00
Plastic Bottles
800
$156.25
$1,25,000.00
$2,50,000.00
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