Question

Potthast Company uses a two-stage system to allocate its overhead to products. The company uses machine hours in the fabrication department and direct labor hours in the assembly department to allocate overhead costs to Work-in-Process. During the current year, the company incurred $50,000 of overhead costs in the fabrication department and $75,000 of overhead costs in the assembly department. The company also reported the following results in the production of its standard and deluxe bicycles.Standard DeluxeMachine hours (fabrication) 1,000 4,000Direct labor hours (assembly) 4,000 6,000Using a two-stage cost allocation, how much overhead should be allocated to the production of deluxe bicycles in the current year?A) $50,000B) $40,000C) None of these.D) $85,000E) $75,000

Answer 1

Answer:

D) $85,000

Explanation:

                                                       Standard                  Deluxe

Machine hours (fabrication)            1,000                       4,000

Direct labor hours (assembly)        4,000                       6,000

If the company spent $50,000 in overhead costs in the fabrication department, then 20% must be allocated to standard bicycles ($10,000) and 80% to deluxe bicycles ($40,000).

If the company spent $75,000 in overhead costs in the assembly department, then 40% must be allocated to standard bicycles ($30,000) and 60% to deluxe bicycles ($45,000).

The total overhead allocated to standard bicycles = $10,000 + $30,000 = $40,000

The total overhead allocated to deluxe bicycles = $40,000 + $45,000 = $85,000