Question

4. ABC Company’s overhead amounts to $300,000 per period based on an output of 200 units of A, 300 units of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to $75, 50, and 40 respectively. Each unit also requires 7, 12, and 20 machine hours per unit of production. Using direct labor as cost driver, overhead chargeable per unit of C amounts to

1. 240
2. 300
3. 360
4. 450
5. None of the above.

From my handout the correct answer is C. 360, but I don't understand how that is calculated.

Answer 1

Overheads = $300,000

Direct labor cost of product A = Number of units x Direct labor cost per unit

= 200 x 75

= $15,000

Direct labor cost of product B = Number of units x Direct labor cost per unit

= 300 x 50

= $15,000

Direct labor cost of product C = Number of units x Direct labor cost per unit

= 500 x 40

= $20,000

Total direct labor cost = Direct labor cost of product A + Direct labor cost of product B + Direct labor cost of product C

= 15,000 + 15,000 + 20,000

= $50,000

Overhead rate = Total Overheads/Total Direct labor cost

= 300,000/50,000

= $6 per direct labor dollar

Overheads chargeable to product C = Direct labor cost of product C x Overhead rate

= 20,000 x 6

= $120,000

overhead chargeable per unit of C = Overheads chargeable to product C/Number of units of C

= 120,000/500

= $240

The correct option is (a)