A firm produces and sells two products, Plus and Max. The following information is available relating to setup costs (a part of factory overhead):

Plus Max
Units produced 200 16,000
Batch size (units) 10 400
Number of setups 20 40
Direct labor hours per unit 5 5
Total direct labor hours 1,000 80,000
Cost per setup $1,080
Total setup cost $64,800

With traditional two-stage allocation of overhead costs, using direct labor hours as the allocation base, the setup cost portion of overhead that is allocated to each unit of product for Plus and Max, respectively is:

In order to calculate setup cost allocation per unit, we first calculate the total setup costs for each product. These costs are then divided on the cost base which is the direct labor hours for each unit.

Total setup costs:

Plus

Direct Labor hours = 1,000

Setups = 20

Total costs = 20 * 1080 = $21,600

Total Setup Cost / labor hour = 21600 / 1000 = $21.6

Max

Direct Labor hours = 80,000

Setups = 40

Total costs = 40 * 1080 = $43,200

Total Setup Cost / labor hour = 43200 / 80000 = $0.54

We can calculate peer unit allocation of each product by multiplying the per hour rate calculated above with the number of hours used to make each product.

Plus = 21.6 * 5 = $108

Max = 0.54 * 5 = $2.7

These are the costs allocated per unit.

Hope that helps.