Lopez 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: Support Department A's costs are allocated based on square metres,and Support Department B's costs are allocated based on number of employees.Department C uses direct labour hours to assign overhead costs to products,while Department D uses machine hours.
One of the products the company produces requires 4 direct labour hours per unit in Department C and no time in Department D.Direct materials for the product cost $45 per unit,and direct labour is $20 per unit.
If the sequential method of allocation is used and the company follows its usual pricing policy,what would be the selling price of the product (with allocations rounded to the nearest whole dollar and the costs per unit rounded to two decimal places)?

Question

Lopez 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:  Support Department A's costs are allocated based on square metres,and Support Department B's costs are allocated based on number of employees.Department C uses direct labour hours to assign overhead costs to products,while Department D uses machine hours.
One of the products the company produces requires 4 direct labour hours per unit in Department C and no time in Department D.Direct materials for the product cost $45 per unit,and direct labour is $20 per unit.
If the sequential method of allocation is used and the company follows its usual pricing policy,what would be the selling price of the product (with allocations rounded to the nearest whole dollar and the costs per unit rounded to two decimal places)?

Quizplus · Accepted Answer

To calculate the full cost of the product, we need to allocate the budgeted costs of each department to the product using the sequential method.

First, we allocate the costs of Support Department A based on square meters:

Product area = 40 sq. m. / 100 units = 0.4 sq. m. per unit

Allocated cost of Support Department A = $300,000 × 0.4 sq. m./sq. m. = $120,000

Next, we allocate the costs of Support Department B based on number of employees:

Allocated cost of Support Department B = $150,000 × (50/250) employees per unit = $30,000

Now, we can allocate the overhead costs of Department C and D based on their respective allocation bases:

Department C allocation rate = $75,000 / 50,000 direct labor hours = $1.50 per direct labor hour 
Department D allocation rate = $210,000 / 70,000 machine hours = $3.00 per machine hour

For the product, we have:

Direct materials = $45 
Direct labor = $20 
Department C overhead = 4 direct labor hours × $1.50 per direct labor hour = $6 
Department D overhead = 0 machine hours × $3.00 per machine hour = $0

Total cost per unit = $45 + $20 + $6 + $0 + $120,000/100 units + $30,000/100 units 
                   = $191.00

Selling price per unit = Full cost per unit × (1 + 40%) 
                                = $191.00 × 1.4 
                                ≈ $267.40

Rounded to the nearest whole dollar, the selling price is $159.

Lopez Manufacturing Prices Its Products at Full Cost Plus 40