Question

Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,254,000 based on production of 350,000 handheld consoles and 107,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,158,500		$	409,000		$	1,567,500
Materials		800,000			657,000			1,457,000

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

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	540,000		35	10	45
Quality tests performed		522,000		13	16	29
Shipping orders processed		192,000		110	50	160
Total overhead	$	1,254,000

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 "Total cost per unit" to 2 decimal places.)

	Overhead Total Cost per Unit Handheld Home

b. How much 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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

	Overhead Total Cost per Unit Handheld Home

Answer 1

Solution a:

Computation of Activity rates
Cost driver	Cost assigned	Total activity level	Activity rate
Number of production runs	$5,40,000	45	$12,000
Quality test performed	$5,22,000	29	$18,000
Shipping orders processed	$1,92,000	160	$1,200
Total	$12,54,000

Computation of Overhead assigned to products
	Handheld			Home
Activity cost pool	Activity level used	Activity rate	Cost assigned	Activity level used	Activity rate	Cost assigned
Number of production runs	35	12000.00	$4,20,000	10	12000.00	$1,20,000
Quality test performed	13	18000.00	$2,34,000	16	18000.00	$2,88,000
Shipping orders processed	110	1200.00	$1,32,000	50	1200.00	$60,000
Total Overhead cost assigned			$7,86,000			$4,68,000

Computation of Total Cost per unit
	Handheld	Home
Direct labor	$11,58,500	$4,09,000
Materials	$8,00,000	$6,57,000
Overhead Costs	$7,86,000	$4,68,000
Total Costs	$27,44,500	$15,34,000
No. of units	350000	107000
Cost per unit	$7.84	$14.34

Solution b:

Overhead allocated to Handheld = $1254000 / $1567500 * $1158500 = $926,800

Overhead allocated to Home = $1254000 / $1567500 * $409000 = $327,200

Computation of Total Cost per unit
	Handheld	Home
Direct labor	$11,58,500	$4,09,000
Materials	$8,00,000	$6,57,000
Overhead Costs	$9,26,800	$3,27,200
Total Costs	$28,85,300	$13,93,200
No. of units	350000	107000
Cost per unit	$8.24	$13.02