Question

Kirsten believes her company's overhead costs are driven (affected) by the number of direct labor hours because the production process is very labor intensive. During the period, the company produced 5,200 units of Product A requiring a total of 820 labor hours and 2,700 units of Product B requiring a total of 220 labor hours. What allocation rate should be used if the company incurs overhead costs of $22,880?

Answer 1

The overhead allocation rate for Kirsten's company should be $22 per labor hour, calculated by dividing the total overhead cost of $22,880 by the total direct labor hours of 1,040.

Step-by-step explanation:

Kirsten believes her company's overhead costs are influenced by the number of direct labor hours because of the labor-intensive nature of the production process. To determine the allocation rate for overhead costs, the total direct labor hours used across all products must first be calculated.

In Kirsten's company, 5,200 units of Product A required 820 labor hours, and 2,700 units of Product B required 220 labor hours, thus a total of 1,040 labor hours were used. With an overhead cost of $22,880 and a total of 1,040 labor hours, the company would use the following formula to find the overhead rate per labor hour: $22,880 / 1,040 labor hours = $22 per labor hour. Hence, the allocation rate that should be used is $22 per labor hour.