10. Make the following calculations involving overhead: (a) Assume a manufacture

Question

10. Make the following calculations involving overhead: (a) Assume a manufacturer incurs 2,000,000 hours of direct productive labor in a year at a total labor cost of $5,000,000. The total manufacturing indirect expense for the same period is $6,750,000. (1) What is the average direct labor hour cost? (2) If the overhead were distributed on the basis of direct labor hours what would the rate be per hour? (3) If the over head were distributed on the basis of direct labor dollars, what would be the percentage rate applied to direct labor costs? (b) Using the same factors as above, assume that we have two projects, each requiring 100,000 direct labor hours. On Project A, because of work requirements and personnel assigned, direct labor costs of $204,000, or $2.04 per hour, were experienced. Project B, on the other hand, requires a direct labor cost of $280,000, or $2.80 per hour. Calculate the amount of overhead that would be allocated to these two projects on a labor hour and a labor dollar basis. Direct Labor Direct Labor Hour Method Dollar Method Project A $ $ Project B $ $

Explanation / Answer

Answer a1 Total Labour cost in a year = $50,00,000 Total Labour hours in a year = 2,000,000 hours Hence rate per labour hour = $50,00,000 / 20,00,000 hours = $2.50 per hour Average direct labour hour cost = $2.50 per hour Answer a2 Manufacturing overhead for the year = $67,50,000 Total Labour hours in a year = 2,000,000 hours Overhead distribution rate per hour = $6750000 / 20,00,000 hours = $3.375 per hour Answer a3 Total Labour cost in a year = $50,00,000 Manufacturing overhead for the year = $67,50,000 Overhead distribution % = (6750000/5000000)*100 = 135% of direct labour cost Answer b Project A Project B Direct labour cost in $ 204000 280000 Direct labour cost per hour in $ 2.04 2.8 Total Direct labour hour required 100000 100000 Allocation of overheads on Labour hour basis ($2.50 per hour) in $ 250000 250000 Allocation of overheads on Labour dollar basis (135% of direct labour cost) in $ 275400 378000

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