Question

Rachel’s Costume Creations has two product lines: machine-made costumes and hand-made costumes. The company assigns $96,000 in manufacturing overhead costs to two cost pools: power costs and inspection costs. Of this amount, the power cost pool has been assigned $38,400 and the inspection cost pool has been assigned $57,600. Additional information about each product line is provided below.

	Machine-Made			Hand-Made
Sales revenue	$	360,416		$	199,584
Direct labor and materials costs	$	144,000		$	120,000
Units produced and sold		66,736			16,632
Machine-hours		120,000			5,000
Square feet of production space		1,500			1,000
Material orders received		180			125
Quality control inspection hours		2,500			625

a. Allocate the manufacturing overhead from the activity cost pools to each product line.

b. Compute the cost per unit of machine-made costumes and hand-made costumes.

c. Compute the profitability per unit of each product line.

A.

Allocation of power-cost pool to each product line: Step 1: % of total Machine hours used for machine-made costumes % Machine hours used for hand-made costumes % Total machine hours % Step 2: Costs allocated to machine-made costumes Costs allocated to hand-made costumes Total power costs allocated to products Allocation of inspection-cost pool to each product line: Step 1: % of total Inspection hours for machine-made costumes % Inspection hours for hand-made costumes % Total inspection hours % Step 2: Costs assigned to machine-made costumes Costs assigned to hand-made costumes Total inspection costs allocated to products

B.

	Machine-Made Costumes Hand-Made Costumes Manufacturing Costs Per Unit

C.

	Machine-Made Costumes Hand-Made Costumes Profitability Per Unit

Answer 1

A.
	Allocation of power-cost pool to each product line:
	Step 1:	% of total
	Machine hours used for machine-made costumes	96%
	Machine hours used for hand-made costumes	4%
	Total machine hours	100%
	Step 2:
	Costs allocated to machine-made costumes	$36,864
	Costs allocated to hand-made costumes	$1,536
	Total power costs allocated to products	$38,400
	Allocation of inspection-cost pool to each product line:
	Step 1:	% of total
	Inspection hours for machine-made costumes	80%
	Inspection hours for hand-made costumes	20%
	Total inspection hours	100%
	Step 2:
	Costs assigned to machine-made costumes	$46,080
	Costs assigned to hand-made costumes	$11,520
	Total inspection costs allocated to products	$57,600
B.		Machine-Made Costumes	Hand-Made Costumes
	Direct labor and materials costs	$144,000	$120,000
	Overhead
	Power costs	$36,864	$1,536
	Inspections costs	$46,080	$11,520
	Total cost	$226,944	$120,000
	Units produced and sold	66,736	16,632
	Manufacturing Costs Per Unit	$3.40	$7.22
C.		Machine-Made Costumes	Hand-Made Costumes
	Sales revenue	$360,416	$199,584
	Total cost	$226,944	$120,000
	Profitability	$133,472	$79,584
	Units produced and sold	66,736	16,632
	Profitability Per Unit	$2.00	$4.78