Chain Reaction, Inc. allocates overhead using machine hours as the allocation activity. The following information was estimated at the beginning of the year: $300,000 of Estimated Manufacturing Overhead 10,000 Estimated Machine Hours 20,000 Estimated Direct Labor Hours During the year, it took 2,000 machine hours and 6,000 direct labor hours to produce the mountain bikes. How much manufacturing overhead was allocated to the mountain bikes during the year?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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#### Overhead Allocation Using Machine Hours
**Case Study: Chain Reaction, Inc.**
**Background:**
Chain Reaction, Inc. allocates its manufacturing overhead using machine hours as the allocation activity. The relevant information for the year is as follows:
- **Estimated Manufacturing Overhead:** \$300,000
- **Estimated Machine Hours:** 10,000 hours
- **Estimated Direct Labor Hours:** 20,000 hours
**Scenario:**
During the year, it took 2,000 machine hours and 6,000 direct labor hours to produce mountain bikes. The task is to determine the amount of manufacturing overhead that was allocated to the mountain bikes during the year.
**Steps to Calculate Overhead Allocation:**
1. **Determine the Overhead Rate:**
The overhead rate is calculated by dividing the estimated manufacturing overhead by the estimated machine hours.
\[\text{Overhead Rate} = \frac{\text{Estimated Manufacturing Overhead}}{\text{Estimated Machine Hours}}\]
Using the given figures:
\[\text{Overhead Rate} = \frac{300,000}{10,000} = \$30 \text{ per machine hour}\]
2. **Calculate the Total Overhead Allocated:**
Multiply the overhead rate by the actual machine hours used for production.
\[\text{Total Overhead Allocated} = \text{Overhead Rate} \times \text{Actual Machine Hours Used}\]
Given that 2,000 machine hours were used:
\[\text{Total Overhead Allocated} = 30 \times 2,000 = \$60,000\]
**Conclusion:**
The manufacturing overhead allocated to the production of mountain bikes during the year amounts to \$60,000.
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#### Interactive Section
**Question:**
*How much manufacturing overhead was allocated to the mountain bikes during the year?*
*Answer:* \$60,000
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