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OH Allocation

ABC Firm uses a job costing system. OH is applied on the basis of DL dollars. At the beginning of 2020, the firm made the following estimates. Actuals as of the end of the year are also reported.

Estimates Actuals

Direct labour hours 41,000 43,480

Machine hours 207,000 196,600

Direct labour $732,000 $792,310

Direct materials 863,000 858,200

Overhead 2,457,000 2,491,200

On June 17, Job 403 was begun. It was completed on July 30. It required 5,400 machine hours and 960 DLH. Direct manufacturing costs were DM of $7,800 and DL of $21,210.

The job sold for $125,000.

On November 11, Job 890 was begun. It was completed on November 21. It required 3,700 machine hours and 1,250 DLH. Direct manufacturing costs were DM of $7,400 and DL of $28,500. The job sold for $130,000.

1. Compute the cost of jobs 403 and 890.

Overhead rate=estimated overhead cost/estimated labour cost= $2,457,000/$732,000=3.35655 or $3.36 per direct labour dollar

	Job 403	Job 890
Direct Material Cost	$ 7, 800	$ 7,400
Direct Labour Cost	$21,210	$28,500
Manufacturing Overhead Overhead rate X direct labour cost	$71, 265.6	$95,760
Total Cost	$100, 275.6	$131,660

2. Now suppose that, instead of using DL$ as the OH application base, the firm were to use machine hours. Compute the cost of jobs 403 and 890.

Overhead rate=total manufacturing overhead/machine hours=$24,57,000/$207,000=$11.8695 or $11.87 per machine hours.

	Job 403	Job 890
Direct Material Cost	$ 7800	$7400
Direct Labour Dollar	$21,210	$28500
Manufacturing Overhead (overhead rate X machine hours)	$ 64,098	$43919
Total Cost	$93,108	$79,819

From the answer provided, Job 403 and Job 890 use resources in different amounts and should, therefore, have different costs. When the OH application base is DL$, Job 890 appears to cost more than Job 403. When the OH application based is MH, Job 890 appears to cost less than Job 403. The cost of Job 403 is much the same no matter which OH application base is used, but the cost of Job 890 changes quite a bit. (Answer this question from the solution provided at the top)

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