Chapter 12, Problem 9E

Exercise 4-6A    Allocating overhead costs among products

Willey Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following:

Factory manager’s salary	$210,000
Factory utility cost	70,000
Factory supplies	20,000
Total overhead costs	$300,000

Willey uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows:

Cups	300 Hours
Tablecloths	750
Bottles	950
Total machine hours	2,000

Required

a.    Allocate the budgeted overhead costs to the products.

b.    Provide a possible explanation as to why Willey chose machine hours, instead of labor hours, as the allocation base.