Banes Co. incurs $350,000 of overhead costs each year in its three main departme

Question

Banes Co. incurs $350,000 of overhead costs each year in its three main departments, machining ($200,000), inspections ($100,000) and packing ($50,000). The machining department works 4,000 hours per year, there are 500 inspections per year, and the packing department packs 500 orders per year. Information about Banes's two products is as follows:
Product X Product Y
Machining hours 1,000 3,000
Inspections 100 500
Orders packed 350 650
Direct labor hours 1,700 1,800


If traditional costing based on direct labor hours is used, how much overhead is assigned to Product X this year?
A) $84,167
B) $121,154
C) $170,000
D) $175,000

Explanation / Answer

Computing the Predetermined overhead rate: We need to calculate the predetermined overhead rate because traditional costing will assign overhead costs to products usnig Predetermined overhead rate. Predetermined overhead rate = Total estimated overhead costs / Estimated amount of the allocation base                                              = $350,000 / (1700 + 1800)                                              = $350,000 / 3500                                              = $100 per Direct labor hour. Overhead assigned to Product-X: Overhead assigned to Product-X = Predetermined overhead rate * Number of DLH of Product-X                                                    = $100 * 1700                                                    = $170,000 Overhead assigned to Product-Y = Predetermined overhead rate * Number of DLH of Product-Y                                                    = $100 * 1800                                                    = $180,000 Therefore, the correct option is c) $170,000                                                    = $100 * 1800                                                    = $180,000 Therefore, the correct option is c) $170,000

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