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 $301,600. During that time, the company produced 13,600 units of the M-008 and 2,100 units of the M-123. The direct costs of production were as follows:

	M-008		M-123		Total
Direct materials	$	108,800	$	84,000	$	192,800
Direct labor		108,800		42,000		150,800

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	$	129,600		8,000		2,000		10,000
Number of production runs		80,000		20		20		40
Number of inspections		92,000		30		40		70
Total overhead	$	301,600
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? (Round your intermediate calculations and final answers to 2 decimal places.) M-008 M-123 Total overhead Total unit cost 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? (Round "Total unit cost" to 2 decimal places.) M-008 M-123 Total overhead Total unit cost

Answer 1

Solution a:

Computation of Activity rates
Cost driver	Cost assigned	Total activity level	Activity rate
Number of Machine-hours	$1,29,600	10000	$12.96
Number of production runs	$80,000	40	$2,000.00
Number of inspections	$92,000	70	$1,314.29
Total	$3,01,600

Computation of Overhead assigned to products
	M-008			M-123
Activity cost pool	Activity level used	Activity rate	Cost assigned	Activity level used	Activity rate	Cost assigned
Number of Machine-hours	8000	12.96	$1,03,680.00	2000	12.96	$25,920.00
Number of production runs	20	2000.00	$40,000.00	20	2000.00	$40,000.00
Number of inspections	30	1314.29	$39,428.70	40	1314.29	$52,571.60
Total Overhead cost assigned			$1,83,108.70			$1,18,491.60

Computation of Total Cost per unit
	M-008	M-123
Direct Materials	$1,08,800.00	$84,000.00
Direct labor	$1,08,800.00	$42,000.00
Overhead Costs	$1,83,108.70	$1,18,491.60
Total Costs	$4,00,708.70	$2,44,491.60
No. of units	13600	2100
Cost per unit	$29.46	$116.42

Solution b:

Overhead assigned to M-008 = $301600/ 150800 * 108800 = $217,600

Overhead assigned to M-123 = $301600/ 150800 * 42000 = $84,000

Computation of Total Cost per unit
	M-008	M-123
Direct Materials	$1,08,800.00	$84,000.00
Direct labor	$1,08,800.00	$42,000.00
Overhead Costs	$2,17,600.00	$84,000.00
Total Costs	$4,35,200.00	$2,10,000.00
No. of units	13600	2100
Cost per unit	$32.00	$100.00