Question

A company has identified the following overhead costs and cost drivers for the coming year:

    

			Budgeted
Overhead Item	Cost Driver	Budgeted Cost	Activity Level
Machine setup	Number of setups	$ 25,300	220
Inspection	Number of inspections	124,200	4,600
Material handling	Number of material moves	99,200	6,200
Engineering	Engineering hours	12,400	620

        

Budgeted direct labor cost was $130,550 and budgeted direct material cost was $369,540. The following information was collected on three jobs that were completed during the year:

              

	Job 101		Job 102		Job 103
Direct materials	$ 5,250		$ 10,250		$ 6,250
Direct labor	$ 2,300		$ 2,300		$ 4,600
Units completed	50		25		150
Number of setups	1		2		2
Number of inspections	10		5		15
Number of material moves	15		5		40
Engineering hours	5		25		8

     

If the company uses traditional costing and allocates overhead using direct labor cost, what is the cost of each unit of Job 102?

$539.80.

$686.00.

$749.80.

$933.80.

Answer 1

Solution:

Total budgeted overhead cost = $25,300 + $124,200 + $99,200 + $12,400 = $261,100

Budgeted direct labor cost = $130,550

Overhead allocation rate based on direct labor cost = Budgeted overhead / Budgeted direct labor cost = $261,100 / $130,550 = $2 per direct labor dollar

Total cost of Job 102 = Direct material + Direct labor + Overhead applied

= $10,250 + $2,300 + ($2,300 *2) = $17,150

Nos of units in Job 102 = 25

Cost of each unit of Job 102 = $17,150 / 25 = $686 per unit

Hence 2nd option is correct.