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(Solved) (Latest ver. Aug 2020) - Overhead cost allocation

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Assume a builder is constructing three houses simultaneously. The direct materials and direct labor costs for each house are shown below:

House 1
House 2
House 3

Direct Materials
$ 140,000
$ 70,000
$ 90,000

Direct Labor
210,000
130,000
60,000

Overhead

Indirect costs such as supervisory salaries and indirect materials are $84,000.
A) Assume the builder allocates overhead (indirect) costs equally among the three houses. Determine the amount of overhead cost allocated to each house. Comment on whether this allocation scheme is reasonable. Explain why it may be inappropriate to use number of units as the allocation base.

 







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