# Question & Answer: Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rat…..

Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year:

 Estimated overhead \$1,872,000 Expected activity 52,000 Actual activity (direct labor hours): Deluxe dryer 12,000 Regular dryer 40,000 Units produced: Deluxe dryer 24,000 Regular dryer 200,000

Required:

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1. Calculate the predetermined plantwide overhead rate, using direct labor hours.
\$ ______________per hour

Calculate the applied overhead for each product, using direct labor hours.

 Applied overhead Deluxe \$__________ Regular \$__________

2. Calculate the overhead cost per unit for each product. If required, round your answers to the nearest cent.

 Overhead Cost Deluxe_____________ \$ per unit Regular_____________ \$ per unit

3. What if the deluxe product used 24,000 hours (to produce 24,000 units) instead of 12,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 24,000 units are sold.

Profits would (ncrease/ decrease) by \$____________

Solution:

– Overhead Rate is the predetermined rate which is used to apply the manufacturing overhead to production department or products or job orders.

– Normally, it is calculated at the beginning of the period.

– It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).

– Allocation bases may be direct labor hours, direct labor costs, machine hours etc.

Mathematically, it is calculated as follows:

Predetermined Factory Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base

Plant-wide overhead rate means predetermined overhead rate of plant as a whole.

1)

Here, in the question allocation base is direct labor hours.

Predetermined Plant-wide Overhead Rate = Estimated Manufacturing Overhead Cost \$1,872,000 / Estimated Direct Labor Hours 52,000 DLHs

= \$36 per direct labor hour

Deluxe = Actual Direct Labor Hour x Overhead Rate = 12,000 DLHs x \$36 = \$432,000

Regular = Actual DLHs x Overhead Rate = 40,000 DLHs x \$36 = \$1,440,000

2) Overhead Cost per unit for each product

 Total Applied Overhead Total Units Produced Overhead Cost per unit Deluxe \$432,000 24,000 Units \$18 per Unit (432,000 / 24,000) Regular \$1,440,000 200,000 Units \$7.20 per unit (1,440,000 / 200,000)

3)

Direct Labor Hours used by Deluxe Product = 24,000 Hours

Earlier Labor Hours Used by Deluxe Product = 12,000 Hours

Difference in Labor Hours = 12,000 Hours (24,000 – 12,000)

Overhead Rate per DLH = \$36 per DLH

Since the Overhead Cost is increased the profitability of this product line would decrease by \$432,000(12,000 hours x \$36)