Cost Pool System

Mott Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base. Mott has two production departments, P1 and P2. The new accountant at Mott estimates that next year, the total factory overhead costs will be $5000000, and approximately 500,000 direct labor hours will be worked. The accountant also estimates that P1 will use 150,000 direct labor hours, and there will be about $3000000 in overhead costs in P1. P2 will use 350,000 direct labor hours, and there will be $2000000 in overhead costs in P2. Mott has two products, A1 and B1. It takes two direct labor hours in P1 and three direct labor hours in P2 to complete one unit of A1. It takes one direct labor hour in P1 and four direct labor hours in P2 to complete one unit of B1.

Which product will be undercosted and which will be overcosted with the one-cost-pool system?

Faye M Bell!

1st Point : There are two products A1 and B1. Its total factory overhead costs is estimated and it is $ 5000000 and total direct labor hours are 500000. It means to per hour direct labor cost is $10. There are two departments P1 and P2.

2nd Point : For producing one unit of A1 total time total labor hours = 2hrs in P1 + 3hrs in P2 = 5hrs, it means total direct labour cost of one unit of A1 = $ 10 X 5 hrs.

For producing one unit of B1 total labor hours = 1 hr in P1 + 4 hrs in P2 = 5hrs, it means total direct labour cost of producing one unit of B2 = $ 10 X 5 hrs = $ 50

3rd Point : P1 per Labor hour cost = $3000000/150000 = $ 20

P2 per Labor hour cost = $ 2000000/350000 = $ 5.71

4th Point : Meaning of Under costing and Overcosting

5th Point : Decision

Product B1 is overcosted



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Education : Cost Pool System
Cost Pool System
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