Question

Cornerstone Exercise 4.1 (Algorithmic) Applied Overhead and Unit Overhead Cost: Plantwide Rates Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year: Estimated overhead $1,862,000 Expected activity 49,000 Actual activity (direct labor hours): Deluxe dryer 13,000 Regular dryer 36,000 Units produced: Deluxe dryer 26,000 Regular dryer 180,000 Required: 1. Calculate the predetermined plantwide overhead rate, using direct labor hours. $ 38 per hour Calculate the applied overhead for each product, using direct labor hours. Applied overhead Deluxe $ Regular $ 2. Calculate the overhead cost per unit for each product. If required, round your answers to the nearest cent. Overhead Cost Deluxe $ 19 per unit Regular $ 52.60 per unit 3. What if the deluxe product used 26,000 hours (to produce 26,000 units) instead of 13,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 26,000 units are sold. Profits would by $

Answer 1

Part:1)

Estimated Overhead	1862000
Expected Direct Labor Hours	49000

Predetermined plantwide overhead rate, using direct labor hours = Estimated Overhead /Expected Direct Labor Hours

= 18,62,000/49,000

= $38 per Direct Labor Hour

.

Calculation of applied overheads:

Product	Actual Direct Labor Hours (1)	Plantwide overhead rate (2)	Applied Overhead = (1)*(2)
Deluxe	13000	38	494000
Regular	36000	38	1368000

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Part-2)Calculation of overhead cost per unit for each product:

Product	Actual Direct Labor Hours (1)	Plantwide overhead rate (2)	Applied Overhead(3) = (1)*(2)	Units produced (4)	Overhead Cost per unit (5) = (3)/(4)
Deluxe	13000	38	494000	26000	19
Regular	36000	38	1368000	180000	7.6

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Part-3):

Effect on the profitability if the deluxe product used 26,000 hours (to produce 26,000 units) instead of 13,000 hours (total expected hours remain the same) = Increase in Overheads will lead to decrease in profits

= (26,000 Hrs- 13,000Hrs)*Plant Wide Overhead Rate

= 13,000 hrs * 38/Hr

= $494,000

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So Profits will decrease by $494,000