Pyramid Company expects to incur $3,000,000 in manufacturing overhead costs this
ID: 2549324 • Letter: P
Question
Pyramid Company expects to incur $3,000,000 in manufacturing overhead costs this year. During the year, it expects to use 40,000 direct labor hours at a cost of $600,000 and 80,000 machine hours.
Required:
a. Prepare a predetermined overhead rate based on direct labor hours, direct labor cost, and machine hours.
b. Why might Pyramid Company prefer to use machine hours to allocate manufacturing overhead?
c. Using each of the predetermined overhead rates calculated in part a and the data that follows for job 128, determine the cost of job 128
Explanation / Answer
a) Predetermined Overhead rate based on Direct Labor Hours = Manufacturing overhead costs/Direct Labor Hrs
= $3,000,000/40,000 DLHs = $75 per Direct labor hour
Predetermined Overhead rate based on Direct Labor cost = Manufacturing overhead costs/Direct Labor cost
= $3,000,000/600,000 DLHs = $5 per dollar of Direct labor cost
Predetermined Overhead rate based on Machine hrs = Manufacturing overhead costs/Machine Hours
= $3,000,000/80,000 Machine hrs = $37.5 per machine hour
b) The most common allocation bases for manufacturing overhead include machine hours and direct labor hours. The company might prefer the machine hours as allocation base if machine hours are directly used in manufacturing overhead activities and it provides most appropriate allocation of manufacturing overheads.
c) Calculation of cost of job 128
Cost of job 128 based on direct labor hours = Direct Materials+Direct Labor+Manufacturing overhead
= $6,000+$4,000+(300 DLhs*$75 per DLH)
= $6,000+$4,000+$22,500 = $32,500
Cost of job 128 based on direct labor cost = Direct Materials+Direct Labor+Manufacturing overhead
= $6,000+$4,000+($4,000*$5)
= $6,000+$4,000+$20,000 = $30,000
Cost of job 128 based on machine hours = Direct Materials+Direct Labor+Manufacturing overhead
= $6,000+$4,000+(700 machine hours*$37.5)
= $6,000+$4,000+$26,250 = $36,250
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