Problem:
Mallory Corporation produces two products: A and B. The company's expected factory overhead costs for the coming year are as follows:
Overhead Category Estimated Costs
Utilities $300,000
Indirect Materials 150,000
Indirect Labor 50,000
Depreciation 100,000
Materials handling and storage 200,000
Repairs and maintenance 200,000
Supplies 180,000
Insurance 120,000
Other 50,000
_________
Total $1,350,000
Its expected levels of production activity are as follows:
Product A Product B
Machine hours 35,000 15,000
Direct Labor hours 20,000 25,000
Number of Units produced 10,000 5,000
Direct Materials used, in pounds 75,000 125,000
All labor costs $10 per hour; materials cost $1.80 per pound for product A and $2.40 per pound for product B.
A. Calculate the predetermined overhead rate based on direct labor hours and based on machine hours
B. Calculate the unit cost of each product if overhead is applied on the basis of direct labor hours.
C. Calculate the unit cost of each product if overhead is applied onthe basis of machine hours.
D. Compare the unit costs you have just calculated. Why does the choice of an activity base affect unit cost. What implications would the selection of an activity base for allocating overhead have on managerial decisions? What factors should management consider in choosing an activity base for assigning costs?