Question

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company’s two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $332,800. During that time, the company produced 13,300 units of the M-008 and 3,000 units of the M-123. The direct costs of production were as follows.

	M-008		M-123		Total
Direct materials	$	106,400	$	120,000	$	226,400
Direct labor		106,400		60,000		166,400

Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year were as follows.

			Activity Level
Cost Driver		Costs		M-008		M-123		Total
Number of machine-hours	$	165,300		1,000		9,000		10,000
Number of production runs		70,000		20		20		40
Number of inspections		97,500		25		25		50
Total overhead	$	332,800

Required:

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product?

b. How much of the overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product?

Answer 1

a) Computation of total cost per unit

	M - 008	M - 123
Direct Material	$ 106400	$ 120000
Direct Labour	$ 106400	$ 60000
Total Overhead( Note 1)	$ 100280	$ 232520
Total Cost	$ 313080	$ 412520
Number of Units	13300 units	3000 units
Total Unit Cost	$ 23.54	$ 137.51

Explanation:

Total Cost = Direct Material + Direct Labour + Total Overhead

Total Unit Cost = Total Cost / Number of Units

Cost drivers	Costs	Total Activity Level	Activity rate
Machine Hours	$ 165300	10000	$ 16.53
Production Hours	$ 70000	40	$ 1750
Inspections	$ 97500	50	$ 1950

Activity Rate = Cost / Total Activity Level

Machine Hours = $ 165300 / 10000 = $ 16.53

Production Hours = $ 70000 / 40 = $ 1750

Inspections = $ 97500 / 50 = $ 1950

Note 1)

Overhead Cost assigned to M -008

Activity Cost Pool	Total Activity	Activity Rate	Cost Assigned
Machine Hours	1000 hours	$ 16.53	$ 16530
Production Hours	20 hours	$ 1750	$ 35000
Inspections	25 hours	$ 1950	$ 48750
Overhead Cost assigned to M -008	$ 100280

Overhead Cost assigned to M -0123

Activity Cost Pool	Total Activity	Activity Rate	Cost Assigned
Machine Hours	9000 hours	$ 16.53	$ 148770
Production Hours	20 hours	$ 1750	$ 35000
Inspections	25 hours	$ 1950	$ 48750
Overhead Cost assigned to M -008	$ 232520

Cost Assigned = Total Activity x Activity Rate

b) Computation of total cost per unit

	M - 008	M - 123
Direct Material	$ 106400	$ 120000
Direct Labour	$ 106400	$ 60000
Total Overhead	$ 212800	$ 120000
Total Cost	$ 425600	$ 300000
Number of Units	13300 units	3000 units
Total Unit Cost	$ 32	$ 100

The overhead will be assigned to each product if direct labor cost is used to allocate overhead

Calculation of Predetermined rate per direct labour Cost ( the overhead will be assigned to each product if direct labor cost is used to allocate overhead)

Total Overhead Cost = $ 332800

Total Direct Labour Cost = $ 166400

Predetermined rate per direct labour = Total Overhead Cost / Total Direct Labour Cost

= $ 332800 / $ 166400 = $ 2

Therefore,

Overhead Cost assigned to M -008 =  Direct Labour Cost x Predetermined rate per direct labour = $ 106400 x $ 2 = $ 212800

Overhead Cost assigned to M -0123 = Direct Labour Cost x Predetermined rate per direct labour = $ 60000 x $ 2 = $ 120000

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