Exercise 12-4 Allocating overhead costs among products
Nevin Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following.
|
Factory manager’s salary |
$260,000 |
|
Factory utility cost |
121,000 |
|
Factory supplies |
56,000 |
|
Total overhead costs |
$437,000 |
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 |
|
Bottles |
1,140 |
|
Total machine hours |
2,300 |
Required
a. Allocate the budgeted overhead costs to the products.
b. Provide a possible explanation as to why Nevin chose machine hours, instead of labor hours, as the allocation base.
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