Question

Walton Corporation estimated its overhead costs would be $22,200 per month except for January when it pays the $213,600 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $235,800 ($213,600 + $22,200). The company expected to use 7,500 direct labor hours per month except during July, August, and September when the company expected 9,500 hours of direct labor each month to build inventories for high demand that normally occurs during the Christmas season. The company’s actual direct labor hours were the same as the estimated hours. The company made 3,750 units of product in each month except July, August, and September, in which it produced 4,750 units each month. Direct labor costs were $24.10 per unit, and direct materials costs were $10.20 per unit.

Required

1. Calculate a predetermined overhead rate based on direct labor hours.

2. Determine the total allocated overhead cost for January, March, and August.

3. Determine the cost per unit of product for January, March, and August.

4. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $20.10 per unit.

Answer 1

a)
Predetermined overhead rate    =     Total estimated overhead / Total estimated Direct Labour Hours                                                                                              = $480,000 / $96,000                                                                                              =   $5
Estimated Overhead Cost per year = ($22,200 x 11 months ) + $235,800                                                                                                             = $244,200 + $235,800                                                                                                             = $480,000
Direct Labor Hours = ($7,500 x 9 months) + (9,500 x 3 months)                                                                                                              = $67,500 + $28,500                                                                                                             = $96,000
Predetermined overhead rate	$5 per DLH
b)
Allocated overhead cost = Actual DLH*Predetermined overhead rate
	January	March	August
Actual DLH	7,500	7,500	9,500
Predetermined Overhead rate	$5	$5	$5
Total allocated overhead cost (A*B)	$37,500	$37,500	$47,500
c)
	January	March	August
No. of Units (A)	3,750	3,750	4,750
Direct materials (At $10.20)	$38,250	$38,250	$48,450
Direct labor costs (At $24.10)	$90,375	$90,375	$114,475
Total allocated overhead cost	$37,500	$37,500	$47,500
Total Cost (B)	$166,125	$166,125	$210,425
Cost per Unit ( B / A)	$44.30	$44.30	$44.30
d)
Selling price Per Unit = Cost per unit + Gross Margin	$64.40 ($44.30 + $20.10)	$64.40 ($44.30 + $20.10)	$64.40 ($44.30 + $20.10)