This group of questions refer to the same scenario. Please use the information provided to answer all questions.

Aurora Appliances produces two product lines: Compact Ovens and Smart Kettles.

Management is evaluating whether to continue the Compact Oven line, which has underperformed in recent quarters. Fixed overhead for the facility totals $180,000 per month and is allocated based on direct labor hours. Compact Ovens require more labor than Smart Kettles.

Compact Ovens consume 6,000 of the company’s 10,000 direct labor hours. Smart Kettles use the remaining 4,000 hours. Total monthly fixed overhead is $180,000.
Using the allocation rate above, how much fixed overhead is assigned to Compact Ovens?

Question

This group of questions refer to the same scenario. Please use the information provided to answer all questions.

Aurora Appliances produces two product lines: Compact Ovens and Smart Kettles.

Management is evaluating whether to continue the Compact Oven line, which has underperformed in recent quarters. Fixed overhead for the facility totals $180,000 per month and is allocated based on direct labor hours. Compact Ovens require more labor than Smart Kettles.

Compact Ovens consume 6,000 of the company’s 10,000 direct labor hours. Smart Kettles use the remaining 4,000 hours. Total monthly fixed overhead is $180,000.
Using the allocation rate above, how much fixed overhead is assigned to Compact Ovens?

BlackTom AI · Accepted Answer

Fixed overhead is allocated based on direct labor hours, so the allocation rate equals total fixed overhead divided by total direct labor hours.

1. Relevant knowledge points and concepts
- Cost allocation: When fixed overhead is allocated on a base (direct labor hours), each product line receives a portion of total overhead proportional to its share of the allocation base.
- Allocation rate formula: Allocation rate = Total fixed overhead / Total direct labor hours. Allocated overhead for a product = Allocation rate × Direct labor hours used by that product.

2. Step-by-step reasoning process
- Total fixed overhead = $180,000 per month.
- Total direct labor hours = 10,000 hours (6,000 for Compact Ovens + 4,000 for Smart Kettles).
- Compute the allocation rate per direct labor hour, then multiply by the hours used by Compact Ovens.

3. Calculations with intermediate steps
- Allocation rate = $180,000 ÷ 10,000 hours = $18.00 per direct labor hour.
- Allocated overhead to Compact Ovens = $18.00/hour × 6,000 hours = $108,000.

4. Why the correct answer is correct
- Compact Ovens consume 60% of the direct labor hours (6,000/10,000 = 0.60). Applying that proportion to total fixed overhead yields 0.60 × $180,000 = $108,000. Using the allocation rate method gives the same result and correctly assigns overhead based on the stated allocation base.

5. Why the other options are incorrect
- $72,000 corresponds to 4,000 hours (4,000/10,000 = 40% of $180,000), which would allocate the Smart Kettles’ hours to Compact Ovens — incorrect for 6,000 hours.
- $90,000 corresponds to 5,000 hours (50% of $180,000) — not the actual 6,000 hours used.
- $60,000 corresponds to 3,000 hours (30% of $180,000) — also not the correct labor-hour share.

6. Conclusion
The allocated fixed overhead for Compact Ovens is $108,000, which matches the provided correct answer.

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