A firm produces and sells two products, Mica and Plax. The following information is available relating to setup costs (a part of factory overhead): With traditional two-stage allocation of overhead costs, using direct labor hours as the allocation base, the setup cost portion of overhead that is allocated to each unit of product for Mica and Plax, respectively is:
A) $80; $.80.
B) $3.20; $3.20.
C) $4.00; $4.00.
D) $160.00; $12,800.00.
E) $200.00; $16,000.00.

Question

A firm produces and sells two products, Mica and Plax. The following information is available relating to setup costs (a part of factory overhead):  With traditional two-stage allocation of overhead costs, using direct labor hours as the allocation base, the setup cost portion of overhead that is allocated to each unit of product for Mica and Plax, respectively is:
A) $80; $.80. 
B) $3.20; $3.20. 
C) $4.00; $4.00. 
D) $160.00; $12,800.00. 
E) $200.00; $16,000.00.

Quizplus · Accepted Answer

Using traditional two-stage allocation of overhead costs:
Total setup costs = $64,000
Total direct labor hours = 16,000

Setup cost per direct labor hour = $64,000 ÷ 16,000 = $4
Mica requires 1 direct labor hour and Plax requires 1.25 direct labor hours for setup.

Setup cost per unit of Mica = 1 × $4 = $4
Setup cost per unit of Plax = 1.25 × $4 = $5

Therefore, the answer is C, $4.00 for Mica and $4.00 for Plax.

A Firm Produces and Sells Two Products, Mica and Plax