Question:
Predetermined Overhead Rates
Tiger Furnishings produces two models of cabinets for home theater components, the Basic and the Dominator. Data on operations and costs for March follow:
|
|
Basic
|
Dominator
|
Total
|
|
Units produced
|
1,000
|
250
|
1,250
|
|
Machine-hours
|
4,000
|
2,000
|
6,000
|
|
Direct labor-hours
|
3,000
|
2,000
|
5,000
|
|
Direct materials costs
|
$10,000
|
$ 3,750
|
$ 13,750
|
|
Direct labor costs
|
64,500
|
35,500
|
100,000
|
|
Manufacturing overhead costs
|
|
|
174,100
|
|
Total costs
|
|
|
$287,850
|
The president of Tiger Furnishings is confused about the differences in costs that result from using direct labor costs and machine-hours.
Required
a. Explain why the two product costs are different.
b. How would you respond to the president when asked to recommend one allocation base or the other?
c. The president says to choose the allocation base that results in the highest income. Is this an appropriate basis for choosing an allocation base?