Exercise 12-4 Allocating overhead costs among products Nevin Company makes three

Question

Exercise 12-4 Allocating overhead costs among products Nevin Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following. factory managers salary $260,000 factory utility cost 121,000 factory supplies 56,000 total overhead costs $437,000 Nevin uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows. cups 420 hours tablecloths 740 bottles 1,140 total machine hours 2,300 Required A. Allocate the budgeted overhead costs to the products. B. Provide a possible explanation as to why Nevin chose machine hours, instead of labor hours, as the allocation base.

Explanation / Answer

a Allocating the overhead costs to the products: Cups Tablecloths Bottles Total Factory Managers salary $47,478.26 $83,652.17 $128,869.57 $260,000.00 Factory utility costs $22,095.65 $38,930.43 $59,973.91 $121,000.00 Factory supplies $10,226.09 $18,017.39 $27,756.52 $56,000.00 Total overhead costs $79,800.00 $140,600.00 $216,600.00 $437,000.00 b Machine hours should be used to allocate the overhead costs as the overhead costs are related to the number of hours a machine takes to make the product.

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