Reference no: EM131565327

Problem -

XYZ Limited makes two products: HiVol and LoVol. The company has calculated the direct costs of its products as follows:

Costs per unit HiVol LoVol

Direct Materials $300 $150

Direct Labour $180 $200

Each product requires processing in each of three departments: A, B and C. The number of hours of labour in each department to produce each product is as follows:

Labour hours per department Hivol LoVol

Dept A 8 10

Dept B 7 5

Dept C 3 5

Overhead has always been allocated to products on the basis of an overhead rate per direct labour hour. The budget for departmental overheads and planned labour hours is as follows:

Departmental overhead costs A B C total

Total overhead $150,000 $250,000 $200,000 $600,000

Planned labour hours 50,000 40,000 20,000

The number of units produced of each product is:

HiVol LoVol

5,000 1,000

(i) Calculate the overhead rate for each of departments A, B and C and calculate the product cost for HiVol and LoVol.

ii) Will the company's method of product costing result in accurate product costs? Discuss.