Blue Ridge Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. The following table presents information about estimated overhead and direct labor hours. Determine the overhead from both production departments allocated to each unit of Product A if Blue Ridge Marketing Inc. uses a multiple department rate system.

Question

Blue Ridge Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. The following table presents information about estimated overhead and direct labor hours.  Determine the overhead from both production departments allocated to each unit of Product A if Blue Ridge Marketing Inc. uses a multiple department rate system.

Quizplus · Accepted Answer

To calculate the overhead allocated to each unit of Product A using a multiple department rate system, we need to first calculate the departmental overhead rates for each department.

For Department 1, the overhead rate = $246,750 / 9,000 DLH = $27.42 per DLH 
For Department 2, the overhead rate = $580,000 / 16,000 DLH = $36.25 per DLH

Next, we need to allocate the overhead to each unit of Product A based on the direct labor hours used in each department.

For Product A: 
Department 1 DLH = 2,000 
Department 2 DLH = 1,500

Overhead allocated to Product A in Department 1: $27.42 × 2,000 = $54,840 
Overhead allocated to Product A in Department 2: $36.25 × 1,500 = $54,375

Total overhead allocated to Product A: $54,840 + $54,375 = $109,215

Overhead per unit of Product A = Total overhead allocated to Product A / Number of units of Product A = $109,215 / 257 = $425.60 per unit

Therefore, the best choice is B, $425.60 per unit.