Question

Donovan & Parents produces soccer shorts and jerseys for youth leagues. Most of the production is done by machine. Data on operations and costs for March follow.

	Jerseys			Shorts			Total
Units produced		10,600			4,800			15,400
Machine-hours used		1,010			790			1,800
Direct labor-hours		240			100			340
Direct materials costs	$	12,900		$	7,200		$	20,100
Direct labor costs	$	4,800		$	2,000		$	6,800
Manufacturing overhead costs							$	23,553

Management asks the firm’s cost accountant to compute product costs. The accountant first assigns overhead costs to two pools: overhead related to direct materials and overhead related to machine-hours. The analysis of overhead accounts by the cost accountant follows.

Account	Amount			Related to:
Utilities	$	4,050		Machine-hours
Supplies		2,790		Materials
Machine depreciation and maintenance		9,410		Machine-hours
Purchasing and storing materials		3,843		Materials
Miscellaneous		3,460		Machine-hours

Required:

a. Compute the predetermined overhead rates assuming that Donovan uses machine-hours to allocate machine-related overhead costs and materials costs to allocate materials-related overhead costs.

b. Compute the total costs of production and the cost per unit for each of the two products for March.

Answer 1

Solution:

a) Computation of predetermined overhead rate:

Overhead	Estimated cost	Estimated activity	Overhead Activity rate
Machine related	$ 16,920 (Working note 1)	1800 hrs	$ 9.40 ($ 16,920 / 1800 hrs)
Materials related	$ 6,633 (Working note 1)	$ 20,100	33% of materials ($ 6,633 / $ 20,100)*100

Working note 1:

Particulars	Overheads related machine hours	Overheads related to materials
Utilities	$ 4,050
Supplies		$ 2,790
Machine depreciation and maintenance	$ 9,410
Purchasing and storing materials		$ 3,843
Miscellaneous	$ 3,460
Total	$ 16,920	$ 6,633

b) Total cost of production and cost per unit

Particulars	Jerseys	Shorts
Direct materials	$ 12,900	$ 7,200
Direct labor costs	$ 4,800	$ 2,000
Machine overheads	$ 9,494 (1010 machine hrs *$ 9.40) (number of machine hours *overhead rate per hour)	$ 7,426 (790 machine hours *$ 9.40) (number of machine hours *overhead rate per hour)
Material overheads (overhead as % of direct materials cost)	$ 4,257 ($ 12,900*33%) (Direct materials * overhead as % of direct materials cost)	$ 2,376 ($ 7,200 * 33%) (Direct materials * overhead as % of direct materials cost)
Total cost of production	$ 31,451	$ 19,002
Units produced	10,600 units	4,800 units
Cost per unit	$ 2.96 ($ 31,451 / 10,600 units) (Total cost of production  / units produced)	$ 3.95 ($ 19,002 / 4,800 units) (Total cost of production / units produced)

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