Question 1 Perdon Corporation manufactures safeslarge mobile

Question 1 Perdon Corporation manufactures safes-large mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead. Units planned for production Material moves per product line Purchase orders per product line Direct labor hours per product line Mobile Safes 210 310 460 Walk-in Safes 56 200 360 1,700 ? (a) The total estimated manufacturing overhead was $270,000. Under traditional costing (which assigns overhead on the basis of direct labor hours), what amount of manufacturing overhead costs are assigned to: (Round answers to 2 decimal places e.g. 12.25.) (1) One mobile safe per unit (2) One walk-in safe per unit LINK TO T control option command commandoption

Solution

Traditional costing: under traditional costing, total manufacturing overhead is allocated based on either a single rate or a departmental rate. under single rate, one overhead allocation base, such as direct labor hours or machine hours is used. under departmental rate, two different overhead allocation rates are arrived at.

In the given case, total overhead of $270,000 is allocated to each product line based on the direct labor hours.

Overhead rate is arrived by dividing total overhead estimated amount with overhead allocation base i.e. direct labor hours.

Total direct labor hours are estimated to be 800 in mobile safes and 1700 in walk in safes, together 2500 hours.

Overhead allocation rate = estimated overhead/ direct labor hours = 270000/2500 = 108 per direct labor hour.

Product line as a whole, mobile safes uses 800 hours, at a rate of 108 per hour, it becomes 86,400 of overhead of product line mobile safes per annum. Similarly, walk in safes require 183,600 (108*1700 hours) of overhead.

Now we know the amount of overhead used by each product line. Under each product line, overhead per unit is arrived with a formula, total overhead of product line/ total units of product line.

For mobile safes, overhead per unit = 86,400/210 units = 411.43 per unit

for walk in safes, overhead per unit = 183,600/56 units = 3,278.57 per unit.

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