A company estimates total overhead costs for the next year to be $1,200,000 and wishes to use direct labor hours as its overhead allocation base.This company makes two products: (1)Fancy X,which requires three direct labor hours per unit,and (2)Plain X,which requires one direct labor hour per unit.If the company plans to make 10,000 units of Fancy X and 10,000 units of Plain X,then each unit produced will be allocated the same amount of overhead.

Question

Quizplus · Accepted Answer

Since Fancy X requires three times as many direct labor hours as Plain X, it should be allocated a higher amount of overhead cost per unit. Using direct labor hours as the allocation base would result in an inaccurate allocation of overhead costs if the company wishes to allocate the same amount of overhead cost per unit for both products.

A Company Estimates Total Overhead Costs for the Next Year