a) The overhead cost per unit of each model using ABC is computed as follows:
Product XL Product RD
Overhead rate per unit $19.50 $40.50
b) The overhead cost per unit based on a single plant-wide overhead rate using direct labor hours is computed as follows:
Product XL Product RD
Overhead rate per unit $24.00 $40.50
c) The overhead cost allocation method that XL production manager would prefer is ABC (Activity-based Costing Method).
Data and Calculations:
Assumed total overhead costs = $1,500,000
Overhead cost caused by direct labor usage = $750,000
Overhead cost caused by machine usage = $750,000
Product XL Product RD
Direct labor hours per unit 2 3
Machine hours per unit 1 3
Units produced 25,000 25,000
Total labor hours used 50,000 (25,000 x 2) 75,000 (25,000 x 3) 125,000
Total machine hours used 25,000 (25,000 x 1) 75,000 (25,000 x 3) 100,000
Overhead rates based on ABC:
Direct labor hour rate = $6.00 ($750,000/125,000) per DLH
Machine hour rate = $7.50 ($750,000/100,000)
Overhead Rate per Unit based on ABC:
Product XL Product RD
Direct labor hour costs $300,000 ($6 x 50,000) $450,000 ($6 x 75,000)
Machine hour costs 187,500 ($7.50 x 25,000) 562,500 ($7.50 x 75,000)
Total overhead to each $487,500 $1,012,500
Overhead rate per unit $19.50 ($487,500/25,000) $40.50 ($1,012,500/25,000)
Overhead Rate based on Direct Labor Hours = $12 ($1,500,000/125,000)
Product XL Product RD
Total overhead $600,000 ($12 x 50,000) $900,000 ($12 x 75,000)
Overhead rate per unit $24 ($600,000/25,000) $36 ($900,000/25,000)
Thus, the XL manager will prefer ABC while the RD manager will prefer the usage of a single plant-wide overhead rate.
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