Problem -
XYZ Limited makes two products: HiVol and LoVol. The company has calculated the direct costs of its products as follows:
Costs per unit HiVol LoVol
Direct Materials $300 $150
Direct Labour $180 $200
Each product requires processing in each of three departments: A, B and C. The number of hours of labour in each department to produce each product is as follows:
Labour hours per department Hivol LoVol
Dept A 8 10
Dept B 7 5
Dept C 3 5
Overhead has always been allocated to products on the basis of an overhead rate per direct labour hour. The budget for departmental overheads and planned labour hours is as follows:
Departmental overhead costs A B C total
Total overhead $150,000 $250,000 $200,000 $600,000
Planned labour hours 50,000 40,000 20,000
The number of units produced of each product is:
HiVol LoVol
5,000 1,000
(i) Calculate the overhead rate for each of departments A, B and C and calculate the product cost for HiVol and LoVol.
ii) Will the company's method of product costing result in accurate product costs? Discuss.