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 the company 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 the company uses a multiple department rate system.

Quizplus · Accepted Answer

To allocate overhead using a multiple department rate system, we need to first calculate the predetermined overhead rates for each department.

For Department 1: 
Predetermined Overhead Rate = Estimated Overhead Cost / Estimated Direct Labor Hours 
Predetermined Overhead Rate = $81,600 / 3,000 = $27.20 per direct labor hour

For Department 2: 
Predetermined Overhead Rate = Estimated Overhead Cost / Estimated Direct Labor Hours 
Predetermined Overhead Rate = $86,400 / 1,800 = $48 per direct labor hour

Now we can allocate overhead to each unit of Product A:

For Product A: 
Overhead allocated from Department 1 = Predetermined Overhead Rate for Department 1 x Actual Direct Labor Hours for Product A in Department 1 
Overhead allocated from Department 1 = $27.20 x 1,200 = $32,640

Overhead allocated from Department 2 = Predetermined Overhead Rate for Department 2 x Actual Direct Labor Hours for Product A in Department 2 
Overhead allocated from Department 2 = $48 x 1,200 = $57,600

Total overhead allocated to Product A = Overhead allocated from Department 1 + Overhead allocated from Department 2 
Total overhead allocated to Product A = $32,640 + $57,600 = $90,240

Overhead per unit of Product A = Total overhead allocated to Product A / Number of units of Product A 
Overhead per unit of Product A = $90,240 / 212 = $425.60 per unit

Therefore, the correct answer is B. $425.60 per unit.