Question

Determining Plant-wide Overhead Rates and Applying Overhead

ABC Company produces two major products called “Product 1” & “Product 2.” The company budgets total plant-wide overhead costs to be $850,000 during 2016. The company estimates that total plant-wide direct labor hours will amount to 26,500, while total plant-wide machine hours will amount to 45,000. The company has a choice to choose either direct labor hours or machine hours as the allocation base when determining a predetermined overhead rate. Since both products are more machine intensive, ABC Company chooses machine hours as the cost driver. Actual cost data is listed as follows: Product 1 Product 2 Prime costs $900,000 $1,200,000 Activity: Direct Labor Hours 5,000 DLH 6,000 DLH Machine Hours 9,000 MH 12,000 MH Required: 1) Determine the plant-wide predetermined overhead rate. 2) How much overhead is applied to Product 1 & Product 2? 3) Compute total manufacturing costs for Product 1 & Product 2. 4) Compute unit costs of Products 1 and 2. Assume 7,000 units of Product 1 were produced and 4,000 units of Product 2 were produced.

Answer 1

1)	Plant wide pre-determined OH rate = 850000/45000 =	$              18.89
2)		Product 1	Product 2
	Overhead applied (9000*18.89/12000*18.89)	$        1,70,010	$       2,26,680
3)	Prime costs	$        9,00,000	$    12,00,000
	Overhead applied	$        1,70,010	$       2,26,680
	Total manufacturing costs	$      10,70,010	$    14,26,680
4)	Units manufactured	7000	4000
	Unit costs	$            152.86	$          356.67