Outer Limits, Inc Outer Limits' Total Expected Overhead Costs and Related Overhead Data

question 221

Essay

Outer Limits, Inc. produces fencing units which require two processes, A and B, to complete. The best-selling type of fence is made of PVC. Information related to the 8,000 units of pvc fencing produced annually is shown below.

$$\begin{array} { | c | c | } \hline \text { Direct materials } & \$ 450,000 \\\hline \text { Direct labor } & \\\hline \text { Department A (5,000 DLH x } \$ 23 \text { per DLH) } & \$ 115,000 \\\hline \text { Department B (4,000 DLH x } \$ 25 \text { per DLH) } & \$ 100,000 \\\hline \text { Machine hours } & \\\hline \text { Department A } & 2,000 \mathrm { MH } \\\hline \text { Department B } & 3,000 \mathrm { MH } \\\hline\end{array}$$

Outer Limits' total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on machine hours in department A and direct labor hours in department B.

$$\begin{array} { | l | l | l | } \hline & \text { Department A } & \text { Department B } \\\hline \text { Direct labor hours } & 9,000 \mathrm { DLH } & 7,000 \mathrm { DLH } \\\hline \text { Machine hours } & 6,500 \mathrm { MH } & 13,000 \mathrm { MH } \\\hline \text { Manufacturing overhead costs } & \$ 54,600 & \$ 67,060 \\\hline\end{array}$$
Determine the total amount of overhead assigned to each unit of PVC fencing.

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Definitions:

Variable Costing Income Statement

An income statement format that only includes variable costs as cost of goods sold and uses contribution margin to analyze profitability.

Absorption Costing Format

An accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Gross Margin

Gross margin is a company's net sales revenue minus its cost of goods sold, representing the efficiency of a company in managing its direct costs.

Absorption Costing

An accounting method that includes all direct and indirect manufacturing costs in the cost of a product.