Question

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Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2 hours of direct labor time per unit, and the regular model requires 1 hour. Direct materials and labor costs per unit are given below:

                                                                                                Flexible           Rigid

                        Direct materials cost per unit…………           $110.00           $80.00

                        Direct labor cost per unit……………..           $30.00           $15.00

1. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model.

POHR=EIC (Estimated Indirect Cost)/EVAB(Estimated Volume of the Allocation Base)

POHR=600,000/(1000x2) + (10,000x1)

POHR=600,000/12,000

POHR=$50 DLH

Answer 1

Unit product costs:

Particulars	Flexible	Regular
Direct materials	$                110	80
Direct labor	$                  30	15
Overhead	$                120	60
	[$50 X 2]	[$50 X 1]
Cost per unit	$                240	$       145

Cost per unit is $240 for flexible model and $145 for regular model.

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