Determining Plant-wide Overhead Rates and Applying Overhead ABC Company produces

Question

Determining Plant-wide Overhead Rates and Applying Overhead

ABC Company produces two major products called “Product 1” & “Product 2.” The company budgets total plant-wide overhead costs to be $850,000 during 2016. The company estimates that total plant-wide direct labor hours will amount to 26,500, while total plant-wide machine hours will amount to 45,000. The company has a choice to choose either direct labor hours or machine hours as the allocation base when determining a predetermined overhead rate. Since both products are more machine intensive, ABC Company chooses machine hours as the cost driver. Actual cost data is listed as follows: Product 1 Product 2 Prime costs $900,000 $1,200,000 Activity: Direct Labor Hours 5,000 DLH 6,000 DLH Machine Hours 9,000 MH 12,000 MH Required: 1) Determine the plant-wide predetermined overhead rate. 2) How much overhead is applied to Product 1 & Product 2? 3) Compute total manufacturing costs for Product 1 & Product 2. 4) Compute unit costs of Products 1 and 2. Assume 7,000 units of Product 1 were produced and 4,000 units of Product 2 were produced.

Explanation / Answer

1) Plant wide pre-determined OH rate = 850000/45000 = $              18.89 2) Product 1 Product 2 Overhead applied (9000*18.89/12000*18.89) $        1,70,010 $       2,26,680 3) Prime costs $        9,00,000 $    12,00,000 Overhead applied $        1,70,010 $       2,26,680 Total manufacturing costs $      10,70,010 $    14,26,680 4) Units manufactured 7000 4000 Unit costs $            152.86 $          356.67

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