Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing.

Question

Calculate the overhead rates for each method.

 

Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags.  There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour.

Answer 1

We're missing some important data from this question:

To calculate overhead rates using Traditional Allocation Method (based on direct labor hours and Activity-Based Costing (ABC), We’ll need additional data such as the total overhead costs for traditional allocation or the cost pools, total costs, and their respective cost drivers for ABC.

From what you’ve given, we only have direct materials (which are $15 per unit for luxury handbags and $11 per unit for deluxe handbags) and direct labor (which is 12,500 hours total). With a $18 per hour labor rate, the total direct labor cost = 12,500 hours × $18 = $225,000. Please see if there are any missing information from this question.