Section 1: Overhead Allocation Methods

Example Ltd manufactures two products, Product A and Product B. It applies departmental overhead rates based on machine hours for its machining department and direct labour hours for its finishing department. The budgeted overhead costs, prior to the allocation of support department costs, and the budgeted allocation base used in the two production departments are as follows:

Support departments:
Quality control	38,000
Material handling	80,000
	118,000
Production departments:
Machining	200,000	21,000 machine hours
Finishing	160,000	39,000 direct labour hours
	360,000

The usage of the support departments' output for the year is as follows:

	Provider of the service
User of the service	Quality control	Material handling
Quality control	-	700
Material handling	450	-
Machining	500	2,400
Finishing	850	2,500

Example Ltd plans to produce 5,000 units of Product A and 2,000 units of Product B. Product A requires direct material costing $15 per unit and direct labour costing $35 per unit. A unit of Product A is produced using 3 machine hours in the machining department and 5 labour hours in the finishing department. Product B requires direct material costing $23 per unit and direct labour costing $50 per unit. A unit of Product B is produced using 3 machine hours in the machining department and 7 labour hours in the finishing department.

Required:

Use the reciprocal services method to calculate support department cost.

1. Calculate the overhead cost per unit of Product B.
2. Calculate the unit product cost of Product B.