Problem:
Nevin Company makes three products in its factory: plastic cups, plastic table cloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following:
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Factory manager's salary
|
$260,000.00
|
|
Factory utility cost
|
$121,000.00
|
|
Factory supplies
|
$56,000.00
|
|
Total overhead costs
|
$437,000.00
|
Nevin uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows.
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Cups
|
420 hours
|
|
Tablecloths
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740 hours
|
|
Bottles
|
1140 hours
|
|
Total Macine hours
|
2300 hours
|
Required:
a. Allocate the budget overhead costs to the products.
b. Provide a possible explanation as why Nevin chose machine hours, instead of labor hours, as the allocation base.