Parched, Inc. manufactures towels which it sells to retailers. Parched operates

Question

Parched, Inc. manufactures towels which it sells to retailers. Parched operates separate production lines for Bath towels, Hand towels, and Washcloths. The estimated annual manufacturing overhead costs and machine hours associated with each of these production lines are as follows: Overhead costs Machine hours Production line Bath towels Hand towels Washcloths $2,500,000 $3,000,000 $1,000,000 Totals $6,500,000 10,000 15,000 15,000 40,000 If Parched uses a single plantwide rate to allocate its $6.5 million of overhead using machine hours as the allocation base, which products are over-costed or under-costed? OHand towels and Washcloths are under-costed, whereas Bath towels are over-costed Bath towels are under-costed, whereas Hand towels and Washcloths are over-costed Bat h towels and Hand towels are under-costed, whereas Washcloths are over-costed Washcloths are under-costed, whereas Bath towels and Hand towels are over-costed None of the above

Explanation / Answer

Answer : Bath towels and hand towels both are under costing and wash clothes are over costed.

Explanation :

Calculation of Machine Hour rate = Total Overhead/ Total Machine hours $ 6500000/ 40000 162.5 Distribution of overhead Production Line Machine Hours Allocated Overhead (rate* Machine hr) Bath Towels 10000 1625000 Hand Towels 15000 2437500 washcloths 15000 2437500 6500000 statement showing Over Costing and Under Costing Production Line Actual Overhead Cost Allocated Overhead Over/ Under Cost Bath Towels $2,500,000 1625000 ($875,000) Under Hand Towels $3,000,000 2437500 ($562,500) Under washcloths $1,000,000 2437500 $1,437,500 Over

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