Weld Canning company has a busy season lasting six months from September through February and a slack season lasting from March through August. Typical data for these seasons are as follows:
Average monthly direct labors in a busy season = 15,000, in slack season = 5,000.
Average monthly factory overhead costs = $180,000 in busy season, and $80,000 in slack season.
Factory overhead cost is allocated to cases of canned goods on the basis of direct labor hours. The typical case requires one direct labor-hour. The same type of products is packed in all months. On December 31, the company has 25,000 cases in finished goods inventory.
a) If the company allocated each month's factory overhead costs to the products made in that month, what would be the factory overhead cost per case in the busy season and in the slack season, respectively? What would be the factory overhead cost component of finished goods inventory?
b) If, instead, the company used a predetermined annual overhead rate, what would be its cost per case? What would be the factory overhead cost component of finished goods inventory?
c) Discuss which method of overhead allocation is preferable
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busy season slack season
average direct monthly labor hours 15000 5000
average monthly factory ...
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