Question

Leather Company makes two types of women's handbags. Making a standard handbag requires 2 hours of labor while making a deluxe handbag requires 5 hours of labor. During the next year, the company expects to make 2,000 standard handbags and 500 deluxe handbags. Indirect manufacturing costs are expected to be $52,000. Based on this information:
A. $8 of overhead cost should be allocated to each handbag of both types.
B. $20.80 of overhead cost should be allocated to each handbag of both types.
C. $16 of overhead cost should be assigned to each standard handbag and $40 of overhead cost should be assigned to each deluxe bag.
D. None of these

Answer 1

Answer:

C. $16 of overhead cost should be assigned to each standard handbag and $40 of overhead cost should be assigned to each deluxe bag.

Explanation:

Given that

Total indirect manufacturing expected = $52000

And,

Total hours required to manufacture handbags is

= (2,000 standard handbags × 2 hours) + (500 deluxe handbags × 5 hours)  

= 4,000 + 2,500

= 6,500

So,

Indirect cost per hour is

= $52000 ÷ 6500

= $8 per hour

Now

Cost allocated to standard handbags is

= $8 × 2

= $16

And, for deluxe handbag it is

= $8 × 5

= $40