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 $326,400. During that time, the company produced 14,400 units of the M-008 and 2,400 units of the M-123. The direct costs of production were as follows. M-008 M-123 Total Direct materials $ 115,200 $ 96,000 $ 211,200 Direct labor 115,200 48,000 163,200

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 $ 154,900 8,000 2,000 10,000 Number of production runs 80,000 20 20 40 Number of inspections 91,500 15 35 50 Total overhead $ 326,400

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

Question 1

Particulars	M-008	M-123
Direct Materials	115,200	96,000
Add: Direct Labour	115,200	48,000
Add; Overhead	191,370	135,030
Total Product Cost	421,770	279,030
÷ Number of Units Produced	14,400	2,400
Product Cost per Unit	29.29	116.26

	A	B	C= A/B
Particulars	Activity Level Cost	Total Activity Driver	Activity Allocation Rate
Activity 1	154,900	10,000	15.49	Per Machine Hour
Activity 2	80,000	40	2,000	Per Production Run
Activity 3	91,500	50	1,830	Per Inspection Run
Total	326,400

	A	B	C= A*B	D	E = A*D
Particulars	Activity Allocation Rate	Activity Level for M-008	Total Overhead	Activity Level for M-123	Total Overhead
Activity 1	15.49	8,000	123,920	2,000	30,980
Activity 2	2,000	20	40,000	20	40,000
Activity 3	1,830	15	27,450	35	64,050
Total			191,370		135,030

Question 2

Particulars	M-008	M-123
Direct Materials	115,200	96,000
Add: Direct Labour	115,200	48,000
Add: Manufacturing Overhead	230,400	96,000
Total Product Cost	460,800	240,000
÷ Number of Units Produced	14,400	2,400
Product Cost per Unit	32	100

Manufacturing Overhead Rate = Total Estimated Manufacturing Overhead Cost / Total Estimated Direct Labour Cost * 100

Total Estimated Manufacturing Overhead = $ 326,400

Total Direct Labour Cost = $ 163,200

Manufacturing Overhead Rate = 326,400 / 163,200 * 100%

Manufacturing Overhead Rate = 200%

Particulars	M-008	M-123
Manufacturing Overhead Rate	115,200	48,000
* Direct Labour Cost	200%	200%
Total Manufacturing Overheads	230,400	96,000