Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager, and total overhead is $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company must perform 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company's employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger's total material handling costs are $2,000,000 and its total processing costs are $1,160,000. Using ABC, how much overhead would be assigned to the Heater product?

Question

Quizplus · Accepted Answer

Using ABC, the overhead cost assigned to each product is calculated as follows:

Overhead per material move = Total material handling costs ÷ Total material moves
Overhead per material move = $2,000,000 ÷ (600 moves for Heater + 400 moves for Massager)
Overhead per material move = $1,000 per material move

Overhead per purchase order = Total processing costs ÷ Total purchase orders
Overhead per purchase order = $1,160,000 ÷ (900 orders for Heater + 700 orders for Massager)
Overhead per purchase order = $725 per purchase order

Overhead per direct labor hour = Total overhead - (Overhead per material move x Total material moves) - (Overhead per purchase order x Total purchase orders) ÷ Total direct labor hours
Overhead per direct labor hour = $3,160,000 - ($1,000 x 600) - ($725 x 900) ÷ 1,400 direct labor hours for Heater
Overhead per direct labor hour = $1,852.5 per direct labor hour for Heater

Overhead assigned to Heater product = Overhead per direct labor hour x Total direct labor hours for Heater
Overhead assigned to Heater product = $1,852.5 x 1,400 direct labor hours for Heater
Overhead assigned to Heater product = $2,593,500

Therefore, the overhead assigned to the Heater product is $2,593,500, which is closest to option B ($1,852,500).