Santiago Manufacturing prices its products at full cost plus 40 percent. The company operates two support departments and two producing departments.Budgeted costs and normal activity levels are as follows: $$\begin{array} { | l | c | c | r | r | }
\hline & { \text { Support Departments } } && { \text { Producing Departments } } \
\hline & \mathbf { A } & \mathbf { B } & \mathbf { C } & \mathbf { D } \
\hline \text { Overhead costs } & \$ 20,000 & \$ 50,000 & \$ 90,000 & \$ 120,000 \
\hline \text { Square feet } & 2,000 & 2,400 & 4,000 & 12,000 \
\hline \text { Number of employees } & 20 & 30 & 60 & 40 \
\hline \text { Direct labor hours } & - & - & 10,000 & 6,400 \
\hline \text { Machine hours } & - & - & 6,000 & 10,800 \
\hline
\end{array}$$
Support Department A's costs are allocated based on square feet, and Support Department B's costs are allocated based on number of employees. Department C uses direct labor hours to assign overhead costs to products, while Department D uses machine hours.
One of the products the company produces requires 4 direct labor hours per unit in Department C and no time in Department D. Direct materials for the product cost $45 per unit, and direct labor is $20 per unit.
If the direct method of allocation is used and the company follows its usual pricing policy, the selling price of the product would be

Question

Santiago Manufacturing prices its products at full cost plus 40 percent. The company operates two support departments and two producing departments.Budgeted costs and normal activity levels are as follows: $$\begin{array} { | l | c | c | r | r | } 
\hline & { \text { Support Departments } } && { \text { Producing Departments } } \
\hline & \mathbf { A } & \mathbf { B } & \mathbf { C } & \mathbf { D } \
\hline \text { Overhead costs } & \$ 20,000 & \$ 50,000 & \$ 90,000 & \$ 120,000 \
\hline \text { Square feet } & 2,000 & 2,400 & 4,000 & 12,000 \
\hline \text { Number of employees } & 20 & 30 & 60 & 40 \
\hline \text { Direct labor hours } & - & - & 10,000 & 6,400 \
\hline \text { Machine hours } & - & - & 6,000 & 10,800 \
\hline
\end{array}$$
Support Department A's costs are allocated based on square feet, and Support Department B's costs are allocated based on number of employees. Department C uses direct labor hours to assign overhead costs to products, while Department D uses machine hours.
One of the products the company produces requires 4 direct labor hours per unit in Department C and no time in Department D. Direct materials for the product cost $45 per unit, and direct labor is $20 per unit.
If the direct method of allocation is used and the company follows its usual pricing policy, the selling price of the product would be

Quizplus · Accepted Answer

First, allocate the support department costs to the producing departments based on the given bases (square feet for Department A and number of employees for Department B). Then, calculate the overhead rate for Department C using direct labor hours. Finally, add the full cost (direct materials, direct labor, and allocated overhead) and apply the 40% markup to find the selling price.Allocation of Support Department Costs:- Department A ($20,000) based on square feet: C gets $\frac{4,000}{4,000+12,000} = \frac{1}{4}$ of $20,000 = $5,000; D gets $15,000.- Department B ($50,000) based on number of employees: C gets $\frac{60}{60+40} = \frac{3}{5}$ of $50,000 = $30,000; D gets $20,000.Total overhead for C: $90,000 (original) + $5,000 (from A) + $30,000 (from B) = $125,000.Overhead rate for C (using direct labor hours): $125,000 / 10,000 hours = $12.50 per direct labor hour.Cost per unit for the product:- Direct materials: $45- Direct labor: $20- Overhead (4 hours at $12.50/hour): $50Full cost per unit: $45 + $20 + $50 = $115.Selling price (full cost plus 40%): $115 * 1.40 = $161.Therefore, the selling price of the product would be $161.

Santiago Manufacturing Prices Its Products at Full Cost Plus 40