Techno Incorporated, a manufacturer of cameras that can be used as cell phones, faces a critical decision in how it allocates factory overhead costs to its two camera models: High F and Great P. The company traditionally relied on a volume-based costing system that allocated factory overhead based on direct labor dollars. However, the controller at Techno has been exploring the benefits of activity-based costing (ABC) and has decided to make a switch. This shift is significant as it can impact the pricing and profitability of the two camera models. In this essay, we will discuss the application of factory overhead costs for the High F model using the traditional volume-based costing system.
Under the volume-based costing system, factory overhead costs are allocated to products based on a predetermined rate derived from the budgeted factory overhead and the volume of a specific cost driver, which in this case is direct labor dollars. To calculate the applied factory overhead per unit for the High F model, we need to follow these steps:
Step 1: Calculate the predetermined overhead rate (POHR): The predetermined overhead rate is calculated by dividing the total budgeted factory overhead by the total budgeted direct labor dollars.
Total Budgeted Factory Overhead = $1,415,980 Total Budgeted Direct Labor Dollars for High F = 10,500 units × $18.10 per unit = $190,050
POHR = Total Budgeted Factory Overhead / Total Budgeted Direct Labor Dollars for High F POHR = $1,415,980 / $190,050 ≈ $7.45 per direct labor dollar
Step 2: Calculate the applied factory overhead per unit: The applied factory overhead per unit is calculated by multiplying the direct labor cost per unit by the POHR.
Direct Labor Cost per Unit for High F = $18.10 POHR = $7.45 per direct labor dollar
Applied Factory Overhead per Unit for High F = $18.10 × $7.45 ≈ $134.15
Therefore, the applied factory overhead per unit for the High F model using the volume-based costing system is approximately $134.15.
In conclusion, under Techno Incorporated’s traditional volume-based costing system, the applied factory overhead per unit for the High F model is approximately $134.15. This method relies on a predetermined overhead rate based on total budgeted factory overhead and total budgeted direct labor dollars. However, it is important to note that Techno has decided to transition to activity-based costing (ABC), which may provide a more accurate and detailed understanding of how factory overhead costs should be allocated. This shift can lead to better pricing decisions, cost control, and ultimately improved profitability for the company’s camera models.
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