A company estimates total overhead costs for the next year to be $1,500,000 and wishes to use direct labor hours as it overhead allocation base. This company makes two products: (1) Fancy X, which requires 3 direct labor hours per unit; and (2) Plain X, which requires 1 direct labor hour per unit. If the company plans to make 20,000 units of Fancy X and 20,000 units of Plain X then each unit produced will be allocated the same amount of overhead.

Question

Quizplus · Accepted Answer

The overhead allocation per unit will differ because Fancy X requires more direct labor hours per unit than Plain X, leading to different overhead costs per unit.

A Company Estimates Total Overhead Costs for the Next Year