Question

Adams Corporation estimated its overhead costs would be $22,600 per month except for January when it pays the $170,400 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $193,000 ($170,400 + $22,600). The company expected to use 7,600 direct labor hours per month except during July, August, and September when the company expected 9,200 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 3,800 units of product in each month except July, August, and September, in which it produced 4,600 units each month. Direct labor costs were $24.10 per unit, and direct materials costs were $11.00 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 $21.60 per unit.

Answer 1

Month	OVERHEAD COST $	OVERHEAD COST(without Insurance premium) $	Annual premium allocated equally	Total Overhead	Direct Labour Hour	Overhead rate based on direct Labour Hours	production unit	Overhead cost per unit	per unit Labour cost	per unit material cost	total cost	Margin Required	Selling price in $
1	2	3	4	5	6	7	8	9	10	11	12	13	14
JAN (INSURANCE premium+over head)	193000	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
FEB	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
MAR	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
APRIL	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
MAY	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
JUNE	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
JULY	22600	22600	14200	36800	9200	4.00	4600	8.00	24.1	11	43.10	21.6	64.70
AUGS	22600	22600	14200	36800	9200	4.00	4600	8.00	24.1	11	43.10	21.6	64.70
SEPT	22600	22600	14200	36800	9200	4.00	4600	8.00	24.1	11	43.10	21.6	64.70
OCT	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
NOV	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
DEC	22600	22600	14200	36800	7600	4.84	3800	9.68	24.1	11	44.78	21.6	66.38
Answers:
a) Please see column No.7 given above
b) Please see column No.5 highlighted
c) Please see column No. 12
d) Please see column No.14
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