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    Overhead cost allocation

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    Please help with this problem.

    Assume a builder is constructing three houses simultaneously. The direct materials and direct labor costs for each house are shown below:

    House 1
    House 2
    House 3

    Direct Materials
    $ 140,000
    $ 70,000
    $ 90,000

    Direct Labor


    Indirect costs such as supervisory salaries and indirect materials are $84,000.
    A) Assume the builder allocates overhead (indirect) costs equally among the three houses. Determine the amount of overhead cost allocated to each house. Comment on whether this allocation scheme is reasonable. Explain why it may be inappropriate to use number of units as the allocation base.

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    The total overhead cost is $84,000

    A) The overhead cost is allocated equally. The amount of overhead allocated to each house is 84,000/3 = $28,000
    This allocation is not reasonable. The overhead cost ...

    Solution Summary

    The solution explains how overhead costs can be allocated in the given accounting problem.