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Accounting Question

Happily Green has expanded its manufacturing into bio-diesel auto components: fuel systems, exhaust systems, and electrical systems. For the past five years, manufacturing overhead has been applied to products on standard direct labor hours for the units actually produced. The standard cost information is shown below.

          Fuel systems    Exhaust Systems   Electrical Systems   
Units produced & sold
Standard labor hours
Standard direct material cost per unit
Budgeted an actual manufacturing overhead


The direct labor rate is $10 per hour. New machinery that highly automates the production process was installed two years ago and greatly reduced the direct labor time to produce the three products. The selling price for each of the three products is 125% of the manufacturing cost.

Happily Green's segment of the bio-diesel auto industry has become very competitive, and the company's profits have been decreasing. Casper Oil, Happily Green's controller, has been asked by the CEO to analyze the overhead allocations and pricing structure. Oil thinks that future allocations should be based on machine hours an direct labor hours rather than the current allocation method, which is based on direct labor hours only. Oil has determined the additional product information shown below.

          Fuel systems     Exhaust Systems    Electrical Systems
Standard Machine Hours
Manufacturing Overhead:

Direct labor hours

$ 560,000

Machine hours


Question 1: By allocating all of the budgeted overhead based on direct labor hours, calculate the unit manufacturing cost and unit sales price for each of the three systems manufactured at Happily Green.

Question 2: Prepare an analysis for Happily Green using the appropriate cost driver(s)
determined by Casper Oil for manufacturing overhead. Calculate the unit manufacturing cost and unit sales price for each of the three systems.

Questions 3: Based on your calculations in questions 1 and 2, prepare a recommendation for the CEO of Happily Green to increase the firm's profitability.

48-72 Hours
Just 4-10 Days
11+ days

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