Innovative Parts Company manufactures parts to order for antique cars. Innovative makes everything from fenders to engine blocks. Each customer order is treated as a job. They currently have two jobs, No. 9823 and No. 9824, which are complete, although overhead has not yet been applied. The company wants to know what each job's cost would be under alternative overhead allocation rates based on: (1) Direct Labor cost , (2) Direct Labor Hours, and (3) Machine Hours.
Estimates for this year are as follows:
Direct labor cost $ 120,000
Direct Labor Hours 8,000
Machine Hours 5,000
Overhead costs $ 86,000
Depreciation on machinery accounts for 75% of the overhead costs.
The job-cost sheets show the following:
Job 9823 Job 9824
Direct Material $ 855 $ 1,650
Direct Labor cost $ 1,020 $ 1,020
Direct Labor Hours 85 68
Machine Hours 100 200
Required:
a. Determine the overhead allocation rate under the three suggested allocation bases.
b. Calculate the cost of job 9823 and Job 9824 using each of the three bases.
c. Discuss which allocation base appears preferable