Problem 5 15A (Algo) Effect of automation on overhead allocation LO 5 1, 5 3 Stuart Rug Company makes two types of rugs, seasonal and all purpose Both types of rugs are handmade, but the seasonal rugs require significantly more labor because of their decorative designs The annual number of rugs made and the labor hours required to make each type of rug follow Seasonal All Purpose Totals Number of rugs 1,160 2,750 3,910 Number of direct labor hours 121,000 168,000 289,000 Required Assume that annual overhead costs total $89,590 Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug Stuart automates the seasonal rug line, which results in a dramatic decline in labor usage and allows the company to make 1,160 rugs in only 11,500 hours Stuart continues to make the all purpose rugs the same way as before The number of rugs made and the labor hours required to make them after automation follow Seasonal All Purpose Totals Number of rugs 1,160 2,750 3,910 Number of direct labor hours 11,500 168,000 179,500 Overhead costs are expected to increase to $111,290 as a result of the automation Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base Assume that annual overhead costs total $89,590 Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug (Do not round intermediate calculations ) Type of Product Allocated Cost Seasonal All purpose The most appropriate cost driver is Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base (Do not round intermediate calculations ) Type of Product Allocated Cost Seasonal All purpose

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Problem 5-15A (Algo) Effect of automation on overhead allocation LO 5-1, 5-3 Stuart Rug Company makes two types of rugs, seasonal and all-purpose. Both types

Problem 5-15A (Algo) Effect of automation on overhead allocation LO 5-1, 5-3

Stuart Rug Company makes two types of rugs, seasonal and all-purpose. Both types of rugs are handmade, but the seasonal rugs require significantly more labor because of their decorative designs. The annual number of rugs made and the labor hours required to make each type of rug follow:

	Seasonal		All-Purpose		Totals
Number of rugs		1,160		2,750		3,910
Number of direct labor hours		121,000		168,000		289,000

Required

Assume that annual overhead costs total $89,590. Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug.
Stuart automates the seasonal rug line, which results in a dramatic decline in labor usage and allows the company to make 1,160 rugs in only 11,500 hours. Stuart continues to make the all-purpose rugs the same way as before. The number of rugs made and the labor hours required to make them after automation follow:

	Seasonal		All-Purpose		Totals
Number of rugs		1,160		2,750		3,910
Number of direct labor hours		11,500		168,000		179,500

Overhead costs are expected to increase to $111,290 as a result of the automation. Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base.

Assume that annual overhead costs total $89,590. Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug. (Do not round intermediate calculations.)

Type of Product	Allocated Cost
Seasonal
All purpose
The most appropriate cost driver is

Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base. (Do not round intermediate calculations.)