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 B 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 B if Blue Ridge Marketing Inc. uses a multiple department rate system.

Quizplus · Accepted Answer

To calculate the overhead from both production departments allocated to each unit of Product B, we need to use the multiple department rate system. We first need to determine the departmental overhead rates by dividing the estimated departmental overhead by the estimated direct labor hours of each department.

For Department 1, the overhead rate is ($410,000 ÷ 10,000) = $41 per direct labor hour. 
For Department 2, the overhead rate is ($540,000 ÷ 12,000) = $45 per direct labor hour.

Next, we allocate the overhead from each department to each product using the overhead rates calculated above and the direct labor hours used by each product.

For Product B, the total direct labor hours are 2,400 (1,800 in Department 1 and 600 in Department 2).

Allocating overhead from Department 1 = ($41 × 1,800) = $73,800
Allocating overhead from Department 2 = ($45 × 600) = $27,000

Total overhead allocated to Product B = ($73,800 + $27,000) = $100,800

Dividing the total overhead allocated by the total number of units produced for Product B gives us the overhead allocated to each unit.

Overhead allocated to each unit of Product B = ($100,800 ÷ 470) = $214.40

Therefore, the correct answer is C, $214.40 per unit.