Mallory Chemical Corporation produces two products:  A and B.  The company's expected factory overhead costs for the coming year are as follows:
Overhead Category Estimated Costs
Utilities ............ $ 300,000
Indirect Materials ........ 150,000
Indirect Labor .......... 50,000
Depreciation .......... 100,000
Materials handling and storage ... 200,000
Repairs and maintenance ...... 200,000
Supplies ............ 180,000
Insurance ............. 120,000
Other .............. 50,000
Total ............. $ 1,350,000

Its expected levels of production activity are as follows:

All labor costs $10 per hour; materials cost $1.80 per pound for product A and $2.40 per pound for product B.

Required
A.  Calculate the predetermined overhead rate based on direct labor hours and the based on machine hours.
B.  Calculate the unit cost of each product if overhead is applied on the basis of direct labor hours. 
C.  Calculate the unit cost of each product if overhead is applied on the basis of machine hours. 
D.  Compare the unit costs you have just calculated.  Why does the choice of an activity base affect unit cost?  What implications would the selection of an activity base for allocating overhead have on managerial decisions?  What factors should management consider in choosing an activity base for assigningcosts?

Transcribed Image Text:

Machine hours Direct Labor hours Number of Units produced Direct Materials used, in pounds Product A Product B 35,000 15,000 20,000 25,000 10,000 75,000 5,000 125,000