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    Unit cost/ overhead rate

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    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?

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    Solution Summary

    The solution explains how to calculate the overhead rate and use it to calculate the unit costs