Question

# Applied Overhead and Unit Overhead Cost: Plantwide Rates Seco, Inc., produces two types of clothes dryers:...

Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year:

 Estimated overhead \$2,040,000 Expected activity 51,000 Actual activity (direct labor hours): Deluxe dryer 10,000 Regular dryer 41,000 Units produced: Deluxe dryer 20,000 Regular dryer 205,000

Required:

1. Calculate the predetermined plantwide overhead rate, using direct labor hours.
\$ _____per hour

Calculate the applied overhead for each product, using direct labor hours.

 Applied overhead Deluxe \$ Regular \$

2. Calculate the overhead cost per unit for each product. If required, round your answers to the nearest cent.

 Overhead Cost Deluxe \$___ per unit Regular \$ __per unit

3. What if the deluxe product used 20,000 hours (to produce 20,000 units) instead of 10,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 20,000 units are sold.

Profits would _______ by \$_____

1.

= \$2,040,000/51,000

= \$40 per direct labor hour

 Applied overhead (Actual direct labor hours x Predetermined plant wide overhead rate) Deluxe 10,000 x 40 = \$400,000 Regular 41,000 x 40 = \$1,640,000

2.

 Overhead Cost (Applied overhead/Number of units produced) Deluxe 400,000/20,000 = \$20 per unit Regular 1,640,000/205,000 = \$8 per unit

3.

Overhead applied to Deluxe = Actual direct labor hours x Predetermined plant wide overhead rate

= 20,000 x 40

= \$800,000

In this case, overhead applied to Deluxe would increase by \$400,000 (800,000 - 400,000) and hence Profits would decrease by \$400,000

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