Question

The following figures are extracted from an insurance company’s multi-factor productivity formula:

multi-factor productivity: 5.62

DL: $32,000

DM: $12,000

Sales: $325,000

a) what is the FO(factory overhead)?

b) what could be the proper basis for factory allocation?

Answer 1

1. We know that multifactor productivity:

Productivity = Total output / Total input

We can say that the total input is

DL + DM + Overhead

Therefore if we substitute the total input in the formula we will get:

Productivity = Output / (DL + DM + overhead)

Productivity * (DL + DM + overhead) = output

Overhead = output - (Productivity * (DL + DM))

Overhead = 325000 - (5.62 * (32000 + 12000)) = 77720

B. since there is a large overhead value we can say that the company needs to allocate the overhead expenses more accurately, which can be done by using ABC analysis and methodology. Activity-based costing can allow the company to precisely calculate the allocation values based on the processes that actually needs and uses them.