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A firm allocates factory overhead by using one cost pool with direct labor hours as the allocation base. The firm consists of two production departments (A1 and A2). The new accountant at the firm estimates that next year the total factory overhead costs will be $4,000,000 and around 500,000 direct labor hours will be worked. The accountant as well estimates that A1 will use 150,000 direct labor hours and there will be around $2,000,000 in overhead costs in A1. A2 will use 350,000 direct labor hours and there will be $2,000,000 in overhead costs in A2. The firm consists of two products: R4 and R5. It takes two direct labor hours in A1 and three direct labor hours in A2 to complete one unit of R4. It takes one direct labor hour in A1 and four direct labor hours in A2 to complete one unit of R5.

Required:

What overhead cost per unit will you get by using?

a) Plant-wide and

b) Departmental pools?

Which method is better and why? Support your answer with suitable computations.

Accounting Basics, Accounting

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