Question

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
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Department DLH Loans Processed Direct Costs
Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Commercial Department?

(A) $144,000.
(B) $138,000.
(C) $180,000.
(D) $148,500.

Answer 1

Answer:

(A) $144,000.

Explanation:

For computing the indirect costs allocated to the Commercial Department first we have to compute the per unit cost which is shown below:

Per unit cost = (Allocated department overhead indirect cost) ÷ (total number of direct labor hours)

=  $396,000 ÷ 22,000

= $18

The total number of direct labor hours = Consumer + commercial

                                                                = 14,000 + 8,000

                                                                = 22,000

Now the indirect cost equal to

= Per unit cost × Commercial direct labor hours

= $18 × 8,000

= $144,000