Question

Santiago Manufacturing prices its products at full cost plus 40 percent. The company operates two support departments and two producing departments.Budgeted costs and normal activity levels are as follows: Support Departments Producing Departments A B C D Overhead costs $20,000 $50,000 $90,000 $120,000 Square feet 2,000 2,400 4,000 12,000 Number of employees 20 30 60 40 Direct labor hours - - 10,000 6,400 Machine hours - - 6,000 10,800 Support Department A's costs are allocated based on square feet, and Support Department B's costs are allocated based on number of employees. Department C uses direct labor hours to assign overhead costs to products, while Department D uses machine hours. One of the products the company produces requires 4 direct labor hours per unit in Department C and no time in Department D. Direct materials for the product cost $45 per unit, and direct labor is $20 per unit. If the direct method of allocation is used and the company follows its usual pricing policy, the selling price of the product would be

Answer 1

Direct Allocation of support department overheads among producing departments
	Support Department		Producing Department
	A	B	C	D
Overhead cost	$20,000	$50,000	$90,000	$120,000
Allocation of A Department cost	-$20,000		$5,000	$15,000
Allocation of B Department cost		-$50,000	$30,000	$20,000
Total Overhead cost	$0	$0	$125,000	$155,000
Calculation of overhead allocation rate
Overhead allocation rate of C Department = Total overhead cost / Total direct labour hours = $125000 / 16400 hours = $7.62 per direct labour hour
Overhead allocation rate of D Department = Total overhead cost / Total machine hours = $155000 / 16800 hours = $9.23 per machine hour
Calculation of selling price the product
	Per Unit
Direct Material	$45.00
Direct Labour	$20.00
Overheads
- Department C [4 hours * $7.62]	$30.48
- Department D	$0.00
Total Cost per Unit	$95.48
Add : 40% Margin	$38.19
Selling price per unit	$133.67