90.2K

Verified Solution

Link Copied!

Baird Rug Company makes two types of rugs, seasonal and all-purpose. Both types of rugs are handmade, but the seasonal rugs require significantly more labor because of their decorative designs. The annual number of rugs made and the labor hours required to make each type of rug follow:

	Seasonal			All-Purpose			Totals
Number of rugs		1,140			2,720			3,860
Number of direct labor hours		117,000			170,000			287,000

Required

Assume that annual overhead costs total $86,100. Select the appropriate cost driver and determine the amount of overhead to allocate to each type of rug.

Baird automates the seasonal rug line, which results in a dramatic decline in labor usage and allows the company to make 1,140 rugs in only 12,500 hours. Baird continues to make the all-purpose rugs the same way as before. The number of rugs made and the labor hours required to make them after automation follow:

	Seasonal			All-Purpose			Totals
Number of rugs		1,140			2,720			3,860
Number of direct labor hours		12,500			170,000			182,500

Overhead costs are expected to increase to $109,500 as a result of the automation. Allocate the increased overhead cost to the two types of rugs using direct labor hours as the allocation base.

Answer & Explanation Solved by verified expert

See Answer