Munoz Corporation estimated its overhead costs would be $23,600 per month except for January when it pays the $191,610 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $215,210 ($191,610 + $23,600). The company expected to use 7,700 direct labor hours per month except during July, August, and September when the company expected 9,200 hours of direct labor each month to build inventories for high demand that normally occurs during the Christmas season. The company’s actual direct labor hours were the same as the estimated hours. The company made 3,850 units of product in each month except July, August, and September, in which it produced 4,600 units each month. Direct labor costs were $24.80 per unit, and direct materials costs were $10.40 per unit.
Required
Calculate a predetermined overhead rate based on direct labor hours.
Determine the total allocated overhead cost for January, March, and August.
Determine the cost per unit of product for January, March, and August.
Determine the selling price for the product, assuming that the company desires to earn a gross margin of $21.70 per unit.
To calculate the predetermined overhead rate based on direct labor hours, you need to divide the estimated total overhead costs by the estimated total direct labor hours.
1. Predetermined overhead rate = Estimated total overhead costs / Estimated total direct labor hours
Given that the estimated overhead costs are $23,600 per month except for January, and the estimated direct labor hours are 7,700 per month except for July, August, and September, we can calculate the predetermined overhead rate as follows:
Estimated total overhead costs = ($23,600 * 11 months) + $215,210 (January) = $493,410
Estimated total direct labor hours = (7,700 * 11 months) + (9,200 * 3 months) = 95,100
Predetermined overhead rate = $493,410 / 95,100 = $5.18 per direct labor hour
Now, let's move on to determine the total allocated overhead cost for January, March, and August.
2. Total allocated overhead cost = Predetermined overhead rate * Actual direct labor hours
Given that the actual direct labor hours were the same as the estimated hours, we can calculate the total allocated overhead cost for each month as follows:
January: $5.18 * 7,700 hours = $39,926
March: $5.18 * 7,700 hours = $39,926
August: $5.18 * 9,200 hours = $47,656
Next, let's determine the cost per unit of product for January, March, and August.
3. Cost per unit of product = (Direct labor cost per unit + Direct materials cost per unit + Allocated overhead cost per unit)
Given that the direct labor cost per unit is $24.80 and the direct materials cost per unit is $10.40, we can calculate the cost per unit of product for each month as follows:
January: $24.80 + $10.40 + ($39,926 / 3,850 units) = $36.71
March: $24.80 + $10.40 + ($39,926 / 3,850 units) = $36.71
August: $24.80 + $10.40 + ($47,656 / 4,600 units) = $36.11
Finally, let's determine the selling price for the product, assuming a desired gross margin of $21.70 per unit.
4. Selling price = Cost per unit + Desired gross margin per unit
Given that the desired gross margin per unit is $21.70, we can calculate the selling price for each month as follows:
January: $36.71 + $21.70 = $58.41
March: $36.71 + $21.70 = $58.41
August: $36.11 + $21.70 = $57.81
Therefore, the selling price for the product in January, March, and August would be $58.41, $58.41, and $57.81 respectively.