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:
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.
Cups 420 hours
Tablecloths 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.