Stuart Corporation estimated its overhead costs would be $23,200 per month except for January when it pays the $153,540 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $176,740 ($153,540 + $23,200). The company expected to use 7,300 direct labor hours per month except during July, August, and September when the company expected 9,400 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 3,650 units of product in each month except July, August, and September, in which it produced 4,700 units each month. Direct labor costs were $23.60 per unit, and direct materials costs were $10.80 per unit.

Required:
a. Calculate a predetermined overhead rate based on direct labor hours.
b. Determine the total allocated overhead cost for January, March, and August.
c. Determine the cost per unit of product for January, March, and August.
d. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $21.50 per unit.

Answer:

Results are below.

Explanation:

To calculate the predetermined manufacturing overhead rate we need to use the following formula:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

First, we need to calculate the annual estimated overhead and the annual estimated direct labor hours:

Total estimated overhead costs for the period= (23,200*12) + 153,540

Total estimated overhead costs for the period= $431,940

Total direct labor hours= (7,300*9) + (9,400*3)= 93,900

Predetermined manufacturing overhead rate= 431,940 / 93,900

Predetermined manufacturing overhead rate= $4.6 per direct labor hour

To allocate overhead, we need to use the following formula:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

January:

Allocated MOH= 4.6*7,300= $33,580

March:

Allocated MOH= 4.6*7,300= $33,580

August:

Allocated MOH= 4.6*9,400= $43,240

Now, we can calculate the unitary cost:

January:

Unitary cost= (33,580/3,650) + 23.6 + 10.8

Unitary cost=$43.6

March:

Unitary cost= (33,580/3,650) + 23.6 + 10.8

Unitary cost=$43.6

August:

Unitary cost= (43,240/4,700) + 23.6 + 10.8

Unitary cost=$43.6

Finally, the selling price per unit:

Selling price= 43.6 + 21.5

Selling price= $65.1

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