Question A.1: HouseHold Appliance HouseHold Appliance does not manufacture...
HouseHold Appliance
HouseHold Appliance does not manufacture its own motors or electronic controls. The motors for washers must be sturdier than those for dryers, and the controls for washers are also more complex.
As a result, HouseHold Appliance manufactures a higher fraction of the dryer’s value itself, and it purchases a higher fraction of the washer’s value. Using the data shown below, allocate $750,000 in overhead on the basis of (1) labor cost and (2) materials cost.
| Washers | Dryers | |
| 5000 | 4200 | Number per year |
| $20 | $40 | Labor cost (each) |
First, the labor and material costs for the dryers, the washers, and in total are calculated.
| Total | Washers | Dryers | |
| 5000 | 4200 | Number per year | |
| $20 | $40 | Labor cost each | |
| $75 | $50 | Materials cost each | |
| $268,000 | $100,000 | $168,000 | Labor cost |
| $585,000 | $375,000 | $210,000 | Materials cost |
Then, the allocated cost per labor dollar, $2.80, and the allocated cost per material dollar, $1.28, are calculated by dividing the $750K in overhead to be allocated by $268K and $585K, respectively. Finally, the $750,000 in allocated overhead is split between the two products using (1) labor costs and (2) material costs.
| Total | Washers | Dryers | |
| $268,000 | $100,000 | $168,000 | Labor cost |
| 2.80 | 2.80 | Overhead/labor $ | |
| 750,000 | 279,851 | 470,149 | Allocation by labor $ |
| $585,000 | $375,000 | $210,000 | Material cost |
| 1.28 | 1.28 | Overhead/material $ | |
| 750,000 | 480,769 | 269,231 | Allocation by material $ |
If labor cost is the burden vehicle, then 63% of the $750K in overhead is allocated to the dryers. If material cost is the burden vehicle, then 64% is allocated to the washers. In both cases, the $750,000 has been split between the two products. However, neither value is relevant for our purposes, since neither is an incremental cost.