Overhead Allocation: Calculation, Challenges and Solutions

Written assignment on Overhead
Allocation

TABLE OF CONTENTS
Overhead Allocation..................................................................................................................3
Part A.....................................................................................................................................3
Part B......................................................................................................................................3
Part C......................................................................................................................................3
Part D.....................................................................................................................................3
Part E......................................................................................................................................3
Part F......................................................................................................................................3
Part G.....................................................................................................................................3
References..................................................................................................................................4

OVERHEAD ALLOCATION
Part A
Overhead plant wide rate:
=Total overheads / Total machine hours
=$225 000/50 000
=$4.5
Part B
Table 1: Statement showing the calculation of the full product cost of the contract by using
Overhead plant wide rate
Department A Department B Department C Total
Direct material $ 120.00 $ 60.00 $ 10.00 $ 190.00
Direct wages $ 100.00 $ 60.00 $ 10.00 $ 170.00
Production overhead $ 180.00 $ 45.00 $ 225.00
(4.5*40) (4.5*10)
Total cost $ 585.00
Part C
Table 2: Statement showing department overhead costs
Department A Department B Department C
Overhead cost 120000 30000 75000
Allocation to direct labour hours 96000 25000 75000
Allocation to machine hours 24000 5000
Per labour hour overhead rate 9.6 0.5 3
Per machine hour overhead rate 0.6 0.5
Part D
Due to the lack of information of the activity, department overhead costs are first bifurcated
into machine hours and labours and then per hour rate is determined to compute the accurate
cost of the project. By this segregation overhead rate of machine hour and labour, the hour is
determined.