. Making Product X requires 4,000 hours of labor and Product Y requires 6,000 hours of labor. TUV undertakes an automation program that reduces the consumption of labor required by Product Y to only 2,000 hours of labor. Product X is not affected by the automation process. Overhead cost prior to the automation totaled $20,000. After automation, overhead cost amounted to $24,000. Assuming TUV used direct labor hours as a company-wide allocation base both before and after the automation, the amount of overhead cost allocated to:
To determine the amount of overhead cost allocated to each product, we need to calculate the overhead rate before and after the automation process.
Before Automation:
Total overhead cost = $20,000
Total direct labor hours = 4,000 hours (Product X) + 6,000 hours (Product Y) = 10,000 hours
Overhead rate = Total overhead cost / Total direct labor hours
= $20,000 / 10,000 hours
= $2 per labor hour
After Automation:
Total overhead cost = $24,000
Total direct labor hours = 4,000 hours (Product X) + 2,000 hours (Product Y) = 6,000 hours
Overhead rate = Total overhead cost / Total direct labor hours
= $24,000 / 6,000 hours
= $4 per labor hour
Now, we can calculate the allocated overhead cost for each product.
Product X:
Allocated overhead cost (before automation) = Overhead rate (before automation) * Direct labor hours for Product X
= $2 per labor hour * 4,000 hours
= $8,000
Allocated overhead cost (after automation) = Overhead rate (after automation) * Direct labor hours for Product X
= $4 per labor hour * 4,000 hours
= $16,000
Product Y:
Allocated overhead cost (before automation) = Overhead rate (before automation) * Direct labor hours for Product Y
= $2 per labor hour * 6,000 hours
= $12,000
Allocated overhead cost (after automation) = Overhead rate (after automation) * Direct labor hours for Product Y
= $4 per labor hour * 2,000 hours
= $8,000
Therefore, the amounts of overhead cost allocated to each product are:
- Product X: $8,000 (before automation) and $16,000 (after automation)
- Product Y: $12,000 (before automation) and $8,000 (after automation)