Problem 4-21A Allocation to accomplish smoothing LO 4-1, 4-2, 4-3 Velez Corporat

Question

Problem 4-21A Allocation to accomplish smoothing LO 4-1, 4-2, 4-3 Velez Corporation estimated its overhead costs would be $50,000 per month except for January when CHECK FIGURES it pays the $30,000 annual insurance premium on the manufacturing facility. Accordingly, the January a. $7 overhead costs were expected to be $80,000 ($30,000 + $50,000). The company expected to use 7,000 C. March: $69 direct labor hours per month except during July, August, and September when the company expected 9,000 hours of direct labor each month to build inventories for high demand that normally occurs dur ing the Christmas season. The company's actual direct labor hours were the same as the estimated hours. The company made 3,500 units of product in each month except July, August, and September, in which it produced 4,500 units each month. Direct labor costs were $30 per unit, and direct materials costs were $25 per unit. Required a . Calculate a predetermined overhead rate based on direct labor hours. b. Determine the total allocated overhead cost for January, March, and August. C. Determine the cost per unit of product for January, March, and August. d. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $20 per unit.

Explanation / Answer

ReqA: Total overheads : 50,000 per month for 11 months + $ 80,000 for the month of Jan $ 550,000 + 80,000 = $ 630,000 Total Labourhours : 7,000 hours per month for nine months + 9,000 hours per month for July, Aug, Sep 7000*9+9000*3 = 90,000 hours Overhead rate based on labour hours = Total overhead / Total labour hours ( 630,000 / 90,000 ) = $ 7 per labour hour ReqB: Labour hours used in Jan = 7,000 hours Labour hours used in March = 7,000 hours Labour hours used in Aug = 9,000 hours Overhead rate = $ 7 per hour Overhead allocated: Jan = 7,000 hours @ 7 = $ 49,000 Mar = 7,000 hours@7 = $ 49,000 Aug = 9,000 hours @ 7= $ 63,000 ReqC: Total units manufactured = 3500 units per month for nine month+ 4500 units per month for 3 months 3500*9+4500*3= 45,000 units Total cost Of production: Material cost : (45000 units@25) 1125000 Labour cost (45000 units@30) 1350000 Overheads cost (90,000 labour hours@7) 630000 Total cost of production 3105000 Units Produced 45000 Cost per unit 69 (For each of the month) ReqD: Cost per unit 69 Add: Expected profit per unit 20 Selling price per unit 89

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