Question

The Company P produces doors and windows. The company produces 4 windows per door. In each window the company uses half an hour of direct labor and for each door uses one hour. The prime costs of making doors are $ 20 and $ 16 for the windows. Labor represents 60% of the prime costs. The indirect costs estimated for this production total $ 330,000. The company distributes indirect costs through the use of machine hours. The labor cost used in the production of the windows is $ 240,000. A door requires 2 hours of machinery and sales need one hour.

Required determine the cost per unit and total of doors and windows under premise a and answer the required b:

a. The company distributes the indirect costs using machine hours
b. If the actual indirect costs are $ 210,000 determine the effect of this on the cost per unit of each product

Answer 1

Hi,

I have answered both parts of the question along with the requisite calculations. In the question it is mentioned "A door requires 2 hours of machinery and sales need one hour." I am assuming window require one hour as the hours for windows are not referenced anywhere and sales does not require machine hours.

Answer Summary	Doors	Windows
Production	12,500	50,000
Case a - indirect costs $330,000	$          40.80	$          25.20
Case b - indirect costs $210,000	$          37.60	$          23.60
a. Cost per unit and number of doors: The company distributes the indirect costs using machine hours
	Window
Prime Cost	16
Labor Cost per hour (60% of Prime cost) (a)	9.6
Hours per window (b)	0.5
Labor cost per unit (a)/(b)	4.8
Labor cost incurred in production of windows	240,000
Therefore, total windows produced ($240,000/4.8)	50,000
Doors are produced in the ratio 1:4 (50,000/4)	12,500
	Door	Window
Units produced	12,500	50,000
Machine hours	2	1
Total machine hours	25,000	50,000	75,000
Indirect Cost	$330,000
Allocation of cost per hour ($330,000/75,000 hours)	$            4.40
Cost of production:
	Door	Window
Prime Cost (a)	$                20	$                16
Labor Cost per hour (60% of Prime cost)	$                12	$               9.6
Hours (1 for door and 0.5 for window)	1	0.5
Labor cost per unit (b)	$                12	$               4.8
Direct cost (a)+(b)	$            32.0	$             20.8
Indirect costs ($4.40/hour * 2hours/1 hour)	$               8.8	$               4.4
Cost of production: per unit	$          40.80	$          25.20
b) Cost per unit: If the actual indirect cost is $210,000
Indirect Cost	$210,000
Allocation of cost per hour ($210,000/75,000 hours)	$            2.80
Cost of production:
	Door	Window
Prime Cost (a)	$                20	$                16
Labor Cost per hour (60% of Prime cost)	$                12	$             9.60
Hours (1 for door and 0.5 for 4 windows)	1	0.5
Labor cost per unit (b)	$                12	$               4.8
Direct cost (a)+(b)	$            32.0	$          20.80
Indirect costs ($2.80/hour * 2hours/1 hour)	$               5.6	$               2.8
Cost of production: per unit	$          37.60	$          23.60

Please do rate my answer and good luck!

Regards

D