Harrison Company expects to incur $600,000 in manufacturing overhead for the coming year. The company makes two products, A and B, and it has accumulated the following budget information for the products:
Required:1) Use direct labor hours as the cost driver to compute the allocation rate. Determine the amount of budgeted overhead to be allocated to each unit of product A. (Round to the nearest cent.)2) Use machine hours as the cost driver to compute the allocation rate. Determine the amount of budgeted overhead to be allocated to each unit of product A. (Round to the nearest cent.)3) How should Harrison decide between machine hours and direct labor hours
as the cost driver for its manufacturing overhead?
What will be an ideal response?
1) Allocation rate = $600,000 ÷ 30,000 direct labor hours = $20.00 per hour
Amount of overhead per unit of product A = (25,000 × $20) ÷ 10,000 units = $50.00
2) Allocation rate = $600,000 ÷ 45,000 machine hours = $13.33 per hour
Amount of overhead per unit of product A = (15,000 × $13.33) ÷ 10,000 units = $20.00
3) Harrison should consider which of the two possible cost drivers, labor hours or machine hours, is more likely to have a cause-and-effect relationship with overhead costs.
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