Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 40

Two-Stage Allocation and Product Costing

Mets Products produces baseball caps and T-shirts. Most of the production is done by machine. Data on operations and costs for October follow:

	Baseball Caps	T-Shirts	Total
Units produced	10,000	5,000	15,000
Machine-hours used	1,000	800	1,800
Direct labor-hours	200	120	320
Direct materials costs	$12,000	$8,000	$20,000
Direct labor costs	$ 4,000	$2,400	$ 6,400
Manufacturing overhead costs			$22,200

Management asks the firm’s cost accountant to compute product costs. The accountant first assigns overhead costs to two pools: overhead related to direct materials and overhead related to machine-hours. The analysis of overhead accounts by the cost accountant follows:

Account	Amount	Related to:
Utilities	$4,000	Machine-hours
Supplies	2,800	Materials
Machine depreciation and maintenance	8,800	Machine-hours
Purchasing and storing materials	3,200	Materials
Miscellaneous	3,400	Machine-hours

Required

a. Compute the predetermined overhead rates assuming that Mets Products uses machine-hours to allocate machine-related overhead costs and materials costs to allocate materials-related overhead costs.

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b. Compute the total costs of production and the cost per unit for each of the two products for October.

Step 1 of 6

Pre-determined Overhead Rate:

Pre-determined overhead rate is defined as cost per unit of the allocation base used to charge overhead costs to products. Allocation base should be determined based on selection and it can be direct labor cost, machine hours and material costs.

Pre-determined cost is calculated by dividing estimated overhead costs by estimated allocation base.