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Assume the Spring Company produces two Products A and B. Both products are mixed in Department...

Assume the Spring Company produces two Products A and B. Both products are mixed in Department P1 and canned in Department P2. Most of the overhead costs are related to direct materials (DM) in P1, while most of the overhead costs in P2 are related to machine time. Data for a recent month follows:

Department

Overhead Costs

Product

Machine Hours

DM Costs

P1

$600,000

A

10,000

$500,000

B

40,000

$500,000

P2

$450,000

A

45,000

$20,000

B

30,000

$30,000

If Spring uses a plant-wide rate based on machine hours, the total overhead allocated to A and B would be:

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Answer #1

Total overhead

= Overhead of department P1 + Overhead of department P2

= $600,000 + $450,000

= $1,050,000

Total machine hours

= Machine hours in department P1 + Machine hours in department P2

= 10,000 + 40,000 + 45,000 + 30,000

= 125,000 machine hours

So, Overhead absorption rate

= Budgeted Overhead / Budgeted Machine hours

= $1,050,000 / 125,000

= $8.4 per machine hour

So, Overhead allocated to Product A

= (Machine hours in department P1 + Machine hours in department P2) x Overhead absorption rate

= (10,000 + 45,000) x $8.4

= $462,000

, Overhead allocated to Product B

= (Machine hours in department P1 + Machine hours in department P2) x Overhead absorption rate

= (40,000 + 30,000) x $8.4

= $588,000

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