Innovative Parts Company manufactures parts to order for antique cars. Innovative makes everything from fenders to engine blocks. Each customer order is treated as a job. They currently have two jobs, No. 9823 and No. 9824, which are complete, although overhead has not yet been applied. The company wants to know what each jobs cost would be under alternative overhead allocation rates based on: (1) Direct Labor cost , (2) Direct Labor Hours, and (3) Machine Hours.

Estimates for this year are as follows:

Direct labor cost $ 120,000

Direct Labor Hours 8,000

Machine Hours 5,000

Overhead costs $ 86,000

Depreciation on machinery accounts for 75% of the overhead costs.

The job-cost sheets show the following:

Job 9823 Job 9824

Direct Material $ 855 $ 1,650

Direct Labor cost $ 1,020 $ 1,020

Direct Labor Hours 85 68

Machine Hours 100 200

Required:

a. Determine the overhead allocation rate under the three suggested allocation bases.

b. Calculate the cost of job 9823 and Job 9824 using each of the three bases.

Answer

c. Discuss which allocation base appears preferable