Question

Blossom, Inc.‘s overhead costs of $711000 consist of machining $414000; inspecting $212100; and packaging $112000. Machining works 6000 hours a year, 700 inspections occur each year, and 1400 packing order occur each year. Information on the company’s two products are as follows:

		Alpha	Omega
Machining hours		2000	4000
Inspections		200	500
Packing orders		550	850
Direct labor hours		3900	4000

How much overhead is allocated to Alpha using a single overhead rate (based on direct labor hours) and assuming ABC, respectively?

$360000 and $495500

$351000 and $242600

$351000 and $360000

$360000 and $201200

Answer 1

Using single overhead rate.

Total overhead cost = $ 711,000.

Total direct labor hours = 3,900 + 4,000

Total direct labor hours = 7,900 hours.

Rate per direct labor hour = 711,000/7,900

Rate per direct labor hour = 90 per direct labor hour.

Direct labor hour for Alpha = 3,900 hours.

Overhead allocated to Alpha = 3,900 x 90

Overhead allocated to Alpha = $ 351,000.

Using ABC Costing method.

Total cost of machining = $ 414,000

Total machining hours = 6,000 hours.

Cost per machine hour = 414,000/6,000

Cost per machine hour = 69 per machine hour.

Machining cost for Alpha = 2,000 x 69

Machining cost for Alpha = $ 138,000.

Total cost of inspection = $ 212,100

Total inspections = 700

Cost per inspection = 212,100/700

Cost per inspection = $ 303 per inspection.

Inspection cost for Alpha = 200 x 303

Inspection cost for Alpha = $ 60,600.

Total cost of packaging = $ 112,000.

Total packing orders = 1,400

Cost per packing = 112,000/1,400

Cost per packing = $ 80 per packing.

Packing cost for Alpha = 550 x 80

Packing cost for Alpha = $ 44,000.

Total overhead cost for Alpha = 138,000 + 60,600 + 44,000

Total overhead cost for Alpha = $ 242,600.

Hence, option B is the correct answer.

SUMMARY:

Using single overhead,

Cost for Alpha = $ 351,000.

Using ABC costing,

Cost for Alpha = $ 242,600.

Hence, option B is the correct answer.