Santiago Manufacturing prices its products at full cost plus 40 percent. The com

Question

Santiago Manufacturing prices its products at full cost plus 40 percent. The company operates two support departments and two producing departments.Budgeted costs and normal activity levels are as follows: Support Departments Producing Departments A B C D Overhead costs $20,000 $50,000 $90,000 $120,000 Square feet 2,000 2,400 4,000 12,000 Number of employees 20 30 60 40 Direct labor hours - - 10,000 6,400 Machine hours - - 6,000 10,800 Support Department A's costs are allocated based on square feet, and Support Department B's costs are allocated based on number of employees. Department C uses direct labor hours to assign overhead costs to products, while Department D uses machine hours. One of the products the company produces requires 4 direct labor hours per unit in Department C and no time in Department D. Direct materials for the product cost $45 per unit, and direct labor is $20 per unit. If the direct method of allocation is used and the company follows its usual pricing policy, the selling price of the product would be

Explanation / Answer

Direct Allocation of support department overheads among producing departments Support Department Producing Department A B C D Overhead cost $20,000 $50,000 $90,000 $120,000 Allocation of A Department cost -$20,000 $5,000 $15,000 Allocation of B Department cost -$50,000 $30,000 $20,000 Total Overhead cost $0 $0 $125,000 $155,000 Calculation of overhead allocation rate Overhead allocation rate of C Department = Total overhead cost / Total direct labour hours = $125000 / 16400 hours = $7.62 per direct labour hour Overhead allocation rate of D Department = Total overhead cost / Total machine hours = $155000 / 16800 hours = $9.23 per machine hour Calculation of selling price the product Per Unit Direct Material $45.00 Direct Labour $20.00 Overheads - Department C [4 hours * $7.62] $30.48 - Department D $0.00 Total Cost per Unit $95.48 Add : 40% Margin $38.19 Selling price per unit $133.67

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