Overhead Allocated with Direct Labor Dollars Overhead Allocated with Machine Hou
ID: 2557384 • Letter: O
Question
Overhead Allocated with Direct Labor Dollars Overhead Allocated with Machine Hours Machine-Made Hand-Made Total Machine-Made Hand-madTotal $5,000 7,000 25,000 $35,00040 Direct labor Direct materials Machine depreciation (direct Manufacturing overhead 5,000 7,000 Direct labor Direct materials Machine depreciation (direct Manufacturing overhead 35,00040,000 18,000 25,000 5,000 30,000 80,000400,000 $357,000 $138,000 495,000 40,000 18,000 30,000 350,000 400,000 res $408,000 495,000 Cost of goods manufactured 320,000 ost of goods manufactured Full cost per pair Price per pair Margin percent per pair $217.50 300.00 27.50% $408.00 $500.00 18.40% Full cost per pair Price per pair Margin percent per pair $892.50$138.00 $300.00 S500.00 197.50% | 72.40%Explanation / Answer
The diffeence in margin percent is due to the difference in the selling prices,and th basis of allocation of the overheads.
The primary reason seems to be the selling price diference , as the hand-made product is priced 60% higher than the machine-made product.
In the first table the overheads are allocated on the basis of direct labor costs, and hand-made product being more labor intensive (high cost of labor as can be seen from the direct labor cost ), most of the overheads are allocated to the hand made product and hence the cost of the product is higher as compared to the second table.
In the second table the overheads are allocated based on the machine hours, and being from a highly mechanized process, the machine made product has been assigned 80% of the manufacturing overhead.
Form the above we can conclude that, the various items of overhead costs are to be analysed, and check for any other base of allocation, which gives a reasonably correct allocation of the overheads for the two products.
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