Now it's your turn.I'm going to give you the opportunity to calculate overhead rates and allocate overhead to some products.How exciting? All right, the first one let's take a look. The company makes two products, product A and product B. The company uses a plant wide allocation method to allocate manufacturing overhead costs of $90,000. We have some data here about product A. We have some data about Product B. And then we have some data about the total of these two. I'm asking you to determine how much manufacturing overhead per unit is allocated to each product A and B if the company uses the following as the allocation base? So, first you would do an allocation assuming that they're using units as the allocation base. Then second, you would do another allocation separate from that assuming they use direct labor dollars as the allocation base. And then finally, a third allocation separate from the first two, assuming they use machine hours as the allocation base. Take a few minutes, give it a try,then come back and we'll see how you do it? And I will meet you at that light board. Okay, here we are at the light board. How did you do? Let's take a look.We're allocating overhead to product A and product B, and we're asked to use three different allocation bases and see what we come up with. So, let's start with the first base which is the number of units, and let's determine what our allocation rate would be. So the allocation rate is going to be determined by taking our overhead costs divided by the expected amount of the allocation base. And here in this case, we've got the number of units, 3,000 units. So, our allocation rate would be $30 per unit. It's pretty straightforward to determine how much goes to A and how much goes to B, each unit gets $30. That one's pretty straightforward. Now let's step it up a little bit. We've got again the $90,000 in overhead, and the expected amount of the allocation base, the allocation base is direct labor costs, $50,000 in direct labor cost. And so, that allocation rate would be 180 percent of direct labor cost. So let's go over and do our allocations to A and B. All right, A incurs direct labor of $20. So, because it has $20 of direct labor, we're going to allocate 180 percent of that as overhead. So the amount of overhead that product A would get would be $36, which is 180 percent times the $20 in direct labor. And then, Product B would get 180 percent times $15 in direct labor, which would be let's say $27. And the third allocation base we were asked to work with is machine hours. So let's develop our rate. Again, we start with our expected overhead of $90,000, and we divide that by the expected amount of the allocation base, machine hours. And we see an allocation rate of $36 per machine hour. So let's allocate the overhead to the products. Now we've got a rate, A uses a half of machine hour per unit. So a half of machine hour times our $36 per machine hour is an allocation of 18 dollars going to A. So, let's move on to B. B uses, each unit uses one machine hour. So, we would allocate one machine hour times hour rate of $30 per machine hour. So, we'd see an allocation of $36. So hopefully things went well with the calculations. I just want to point out one thing. Notice that the amount of overhead that product A gets allocated differs based on the allocation base that we've chosen to use. The amount of overhead that product B gets allocated differs based on the allocation base that we have chosen to use. What does that tell us? That tells us it's really important to think about that allocation base when we start allocating overhead because the choice that we make can make a difference.
