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

Question

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

Quizplus · Accepted Answer

First, we need to determine the full cost of producing the product.

Direct materials cost per unit = $45 
Direct labor cost per unit = $20 
Direct labor hours per unit = 4

Therefore, the direct labor cost per direct labor hour = $20 ÷ 4 = $5.

Next, we need to allocate the overhead costs to Department C and Department D using the sequential method:

Step 1: Allocate the costs of Support Department A based on square footage. 
Product space used = 2,000 square feet 
Total space used = 10,000 square feet 
Support Department A cost = $120,000

Allocation rate = $120,000 ÷ 10,000 square feet = $12 per square foot

Product allocation = $12 per square foot x 2,000 square feet = $24,000

Step 2: Allocate the costs of Support Department B based on number of employees. 
Product employees = 25 employees 
Total employees = 125 employees 
Support Department B cost = $160,000

Allocation rate = $160,000 ÷ 125 employees = $1,280 per employee

Product allocation = $1,280 per employee x 25 employees = $32,000

Step 3: Allocate overhead costs to Department C and Department D based on activity.

Department C: 
Direct labor hours per unit = 4 
Budgeted direct labor hours = 50,000 
Total overhead costs = $400,000 + $24,000 + $32,000 = $456,000

Allocation rate = $456,000 ÷ 50,000 direct labor hours = $9.12 per direct labor hour

Product allocation = $9.12 per direct labor hour x 4 direct labor hours = $36.48

Department D: 
Machine hours per unit = 0 
Budgeted machine hours = 20,000 
Total overhead costs = $240,000

Allocation rate = $240,000 ÷ 20,000 machine hours = $12 per machine hour

Product allocation = $12 per machine hour x 0 machine hours = $0

Total overhead cost per unit = $45 (direct materials) + $20 (direct labor) + $36.48 (Department C overhead) + $0 (Department D overhead) = $101.48

Selling price per unit = $101.48 x 140% = $141.08 ≈ $159.38

Therefore, the selling price of the product would be $159.38.

Rodriguez Manufacturing Prices Its Products at Full Cost Plus 40