Question

Vaughn manufactures mattresses for the hotel industry. It has two products, Downy and Firm, and total overhead of $507000. The company plans to manufacture 220 Downy mattresses and 290 Firm mattresses this year. In manufacturing the mattresses, the company must perform 730 material moves for the Downy and 340 for the Firm; it processes 112 purchase orders for the Downy and 91 for the Firm; and the company’s employees work 2600 direct labour hours on the Downy product and 3900 on the Firm. Vaughn’s total material handling costs are $305000 and its total purchasing costs are $202000.
Under a traditional costing approach based on direct labour hours, how much overhead would be assigned to the Downy product?

$202800

$253500

$304200

$380250

Answer 1

• Total overhead = $507,000
• Total direct labor hours:
  • Downy: 2,600 direct labor hours
  • Firm: 3,900 direct labor hours
  • Total = 2,600 + 3,900 = 6,500 direct labor hours
• Overhead allocation rate = Total overhead costs ÷ Total direct labor hours = $507,000 ÷ 6,500 direct labor hours = $78 per direct labor hour
• Overhead assigned to the Downy product under a traditional costing approach based on direct labor hours = Direct labor hours spent on Downy product × Overhead rate = 2600 direct labor hours × $78 = $202,800