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 calculate the overhead allocation rate, we need to divide the estimated overhead for each department by the estimated direct labor hours for that department:

Department 1 overhead allocation rate = $90,000 / 9,000 = $10 per direct labor hour
Department 2 overhead allocation rate = $240,000 / 15,000 = $16 per direct labor hour

Next, we can allocate the overhead costs for each department to each product based on the direct labor hours used for that product:

Product A:
Department 1 overhead allocation = 2,500 DLH x $10 per DLH = $25,000
Department 2 overhead allocation = 1,500 DLH x $16 per DLH = $24,000
Total overhead for Product A = $49,000
Overhead per unit of Product A = $49,000 / 115 units = $425.60 per unit

Therefore, the overhead from both production departments allocated to each unit of Product A using a multiple department rate system is $425.60 per unit, which is answer choice B.