Practice Question….

ChargeIt Corporation
This company manufactures two types of products. Each unit of each type receives
an overhead charge. Currently, the company charges overheads using total
forecast annual direct manufacturing labour hours using the total forecast
manufacturing overheads for the year.

The management accountant has recently suggested dividing the total overheads
into two categories: machining overheads and general overheads. If overheads
were to be charged using the proposed two categories, machining overheads
would be charged in using machine hours per unit, and general overheads would
be charged using direct manufacturing labour hours per unit.
ChargeIt Corporation
Required: Using the data on the following slide:

i. Calculate the overhead charge per unit to each type of

product using the TOTAL forecast overheads for the
year.

ii. Calculate the overhead charge per unit using each of the
machining overheads and general overheads.
 ChargeIt Corporation
Type A Type B
Annual forecast production - Units 10,000 20,000
Direct manufacturing labour hours per unit 2 4
Machine hours per unit 8 8

Total Year
Forecast total manufacturing overheads next year $6.40 million
Comprising:
Total machining cost overheads $3.60 million
General manufacturing overheads $2.80 million
i) Using Total Overheads
Total forecast manufacturing overheads for the year ($6.4m)
Total forecast direct manufacturing labour hours for the year (?)

Type A Type B
Units 10,000 20,000
Direct manufacturing labour hours per unit 2 4
Total = 100,000 hours (see right) 20,000 80,000

Overhead charge rate per direct $64.00

manufacturing labour hour
i) Using Total Overheads
Type A Type B
Direct manufacturing labour hours per unit 2 4
Overhead charge rate per labour hour $64 $64
Overhead charge per unit $128 $256
ii) Using machining OH
Total forecast machining overheads for the year ($3.6m)
Total forecast machine hours for the year (?)

Type A Type B
Units 10,000 20,000
Machine hours per unit 8 8
Total = 240,000 hours (see right) 80,000 160,000

Overhead charge rate per machine hour $15.00

ii) Using machining OH
Type A Type B
Machine hours per unit 8 8
Overhead charge rate per machine hour $15 $15
Overhead charge per unit $120 $120
ii) Using General OH
Total forecast general overheads for the year ($2.8m)
Total forecast direct manufacturing labour hours for the year (?)

Type A Type B
Units 10,000 20,000
Direct manufacturing labour hours per unit 2 4
Total = 100,000 hours (see right) 20,000 80,000

Overhead charge rate per direct manufacturing $28.00

labour hour
ii) Using General OH
Type A Type B
Direct manufacturing labour hours per unit 2 4
Overhead charge rate per labour hour $28 $28
Overhead charge per unit $56 $112
ii)Total Overhead Charge to
each unit
Type A Type B
Machining overheads charge per unit $120 $120
General overheads charge per unit $56 $112
Total overhead charge per unit $176 $232

Reminder of i) answers for comparison Type A Type B

Overhead charge per unit $128 $256