Question

Anazi Leather Company manufactures leather handbags and moccasins. The company has been using the single plantwide factory overhead rate method but has decided to evaluate the multiple production department factory overhead rate method to allocate factory overhead.  The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

​Handbags = 60,000 units, 3 hours of direct labor

Moccasins= 40,000 units, 2 hours of direct labor

Total budgeted factory overhead cost = $360,000

The company has two different production departments: Cutting and Sewing. The Cutting Department has a factory overhead budget of $80,000.  Each unit will require 1 direct labor hour or a total of 100,000 direct labor hours.

​The Sewing Department estimates factory overhead in the amount of $280,000. Handbags require 2 hours of sewing time, and Moccasins require 1 hour for a total of 160,000 direct labor hours.

Using the multiple production department factory overhead rate method, compute the total factory overhead to be allocated to each product using direct labor hours as the allocation base.

Answer 1

Answer :

Given data :

Handbags = 60,000 units, direct labor = 3 hrs.

Moccasins= 40,000 units, direct labor = 2 hrs.

Total Budgeted factory overhead cost = $360,000

There are two departments - cutting and sewing in the factory.

Lets calculate calculate the overhead rate for each department:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Manufacturing overhead rate(cutting)= 80,000/100,000= $0.8 / direct labor hour.

Estimated manufacturing overhead rate(sewing) = 280,000/160,000= $1.75 / direct labor hour.

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Lets calculate for Handbags:

For Cutting= 60,000 units* 1 hour= 60,000 hours

For Sewing= 60,000 units* 2 hour= 120,000 hours

TOTAL overhead applied (Handbags) = 60,000*$0.8 + 120,000*1.75= $258,000

Mocassins calculation:

Cutting= 40,000 units* 1 hour= 40,000 hours

Sewing= 40,000 units* 1 hour= 40,000 hours

TOTAL overhead applied on Mocassins = 40,000* 0.8 + 40,000*1.75= $102,000