Question

Aleutian Company produces two products: Rings and Dings. They are manufactured in two departments: Fabrication and Assembly. Data for the products and departments are listed below.

Product	Number of Units	Direct Labor Hours Per Unit	Machine Hours Per Unit
Rings	920	4	3
Dings	1,940	8	10

All of the machine hours take place in the Fabrication Department, which has estimated total factory overhead of $87,700. All of the labor hours take place in the Assembly Department, which has estimated total factory overhead of $70,400.

Aleutian Company uses the multiple production department factory overhead rate method. The Fabrication Department uses machine hours as an allocation base, and the Assembly Department uses direct labor hours.

The total factory overhead allocated per unit of Rings is

a.$4.61

b.$55.28

c.$26.56

d.$68.96

Answer 1

Solution :

Calculation of overhead rate for Fabrication department :

As per the information given in the question we have

Estimated total Factory overhead for Fabrication department = $ 87,700   ;

Allocation basis = Machine hours ;

The total number of machine hours used in Fabrication is calculated as

= ( Number of units of rings * Machine Hours Per Unit of ring ) + ( Number of units of dings * Machine Hours Per Unit of ding )

= ( 920 * 3 ) + ( 1,940 * 10 )

= 2,760 + 19,400 = 22,160

The total number of machine hours used in production = 22,160

The formula for calculating factory overhead rate for Fabrication department is

= Estimated total Factory overhead / Total machine hours

Applying the above values in the formula we have the department overhead rate for Fabrication department as

= $ 87,700 / 22,160

= $ 3.9576

= $ 3.96 ( when rounded off to two decimal places )

Thus the department overhead rate for Fabrication department is = $ 3.96

Calculation of overhead rate for Assembly department :

As per the information given in the question we have

Estimated total Factory overhead for Assembly department = $ 70,400   ;

Allocation basis = Labor hours ;

The total number of labor hours used in Assembly is calculated as

= ( Number of units of rings * Labor Hours Per Unit of ring ) + ( Number of units of dings * Labor Hours Per Unit of ding )

= ( 920 * 4 ) + ( 1,940 * 8 )

= 3,680 + 15,520 = 19,200

The total number of labor hours used in Assembly = 19,200

The formula for calculating factory overhead rate for Assembly department is

= Estimated total Factory overhead / Total labor hours

Applying the above values in the formula we have the department overhead rate for Assembly department as

= $ 70,400 / 19,200

= $ 3.6667

= $ 3.67 ( when rounded off to two decimal places )

Thus the department overhead rate for Assembly department is = $ 3.67

Calculation of amount of factory overhead rate that is allocated to each unit of Rings as per the multiple production department factory overhead rate method :

As per the information available in the question and the calculations made above we have

No. of hours of fabrication required by each unit of Rings = 3 hours ;

No. of hours of assembly required by each unit of Rings = 4 hours ;

Department overhead rate for Fabrication department is = $ 3.96

Department overhead rate for Assembly department is = $ 3.67

Thus the factory overhead allocated to each unit of Rings is

= [ No. of hours of fabrication required by each unit of Rings * Department overhead rate for Fabrication department ] + [ No. of hours of assembly required by each unit of Rings * Department overhead rate for Assembly department ]

= [ 3 * $ 3.96 ] + [ 4 * $ 3.67 ]

= $ 11.88 + $ 14.68

= $ 26.56

The factory overhead allocated per unit of Rings is = $ 26.56

The solution is option c. $ 26.56