Assuming use of direct-labor hours to apply overhead to production,
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Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period is $800,000 and 25,000 hours, respectively. Information about the company’s products follows.
| Standard: | Enhanced: | |
|
Estimated production volume |
3,000 units | 4,000 units |
|
Direct-material cost |
$25 per unit | $40 per unit |
|
Direct labor per unit |
3 hours at $12 per hour | 4 hours at $12 per hour |
Ontario’s overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively.
Data relevant to these activities follow:
| Orders Processed | Machine Hours Worked | Inspection Hours | |
|
Standard |
300 | 18,000 | 2,000 |
|
Enhanced |
200 | 22,000 | 8,000 |
|
Total |
500 | 40,000 | 10,000 |
Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.
