ERCISE6-12, Problems Associated with Too Few Cost Pools [LO 21 Mort ing allocate
ID: 2517917 • Letter: E
Question
ERCISE6-12, Problems Associated with Too Few Cost Pools [LO 21 Mort ing allocates factory overhead using one cost pool with direct labor hours as the Morton has two production departments, P1 and P2. The new accountant at Morton next year, the total factory overhead costs will be $5,00 labor hours will be worked. The accountant also estimates that PI will use 200,000 direct labor hours, and there will be about $3,000,000 in overhead costs in Pl. P2 will use 300,000 direct labor orton Manufactur estimates that 0,000, and approximately 500,000 direct hours, and there ill be $2,000,000 in overhead costs in P2. Morton has two products, Al and Bl. It takes two direct labor hours in Pl and three direct labor hours in P2 to complete one unit of AL It takes one direct labor hour in P1 and four direct labor hours in P2 to complete one unit of BI. REQUIRED Which product will be undercosted and which will be overcosted with the one-cost-pool system? Support your answer with appropriate calculations. Round all amounts 2 decimal places.Explanation / Answer
Estimated factory overhead cost = $5,000,000
Estimated direct labour hours worked = 500,000
Overhead cost per labour hour = $10
As per Accountant's Estimate,
Overhead cost per labour hour in P1 = 3,000,000/200,0000 = $15
Overhead cost per labour hour in P2 = 2,000,000/300,000 = $6.67
Therefore, cost of one unit of A1 = (2x15)+(3x6.67) = $50
Cost of one unit of A2 = (1x15)+(4x6.67) = $41.67
Under one cost pool system,
cost of one unit of A1 = (2x10)+(3x10) = $50
cost of one unit of A2 = (1x10)+(4x10) = $50
Therefore, cost of one unit of A1 would be same but cost of one unit of A2 would be overcosted by $8.33 with the one-cost-pool system.
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