Reference no: EM133008253

The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year.

Unit costs for materials and direct labour are:

                                           Product 1                 Product 2

Direct Labour                     7 US$               15 US$

Direct material                   9 US$                20 US$

Problem a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.