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 $1,317,000 based on production of 300,000 handheld consoles and 88,000 home consoles. Direct labor and direct materials costs were as follows:

Handheld Home Total Direct labor $1,245,250 $401,000 $1,646,250

Materials 720,000 678,000 1,398,000

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 $ 550,000 40 15 55

Quality tests performed 580,000 13 16 29

Shipping orders processed 187,000 120 50 170

Total overhead $ 1,317,000

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.)

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.)

Answer 1

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Part a:
	a	b	c=a/b	Handheld		Home
Activity	Cost	Total Driver	Activity rate	No of Driver	Overhead Allocated	No of Driver	Overhead Allocated
No of Production Run	$               550,000	55	$     10,000	40	$                 400,000	15	$                 150,000
Quality Test Performed	$               580,000	29	$     20,000	13	$                 260,000	16	$                 320,000
Shipping Order	$               187,000	170	$       1,100	120	$                 132,000	50	$                   55,000
Total	$            1,317,000				$                 792,000		$                 525,000
No of Units					300000		88000
Overhead Per unit					$                       2.64		$                       5.97
Product Cost per Unit:
		Handheld	Home
Direct Material		$   720,000	$   678,000
Direct Labor		$1,245,250	$   401,000
Manufacturing Overheads		$   792,000	$   525,000
Total Cost	a	$2,757,250	$1,604,000
No of Units	b	300000	88000
Cost per unit	a/b	$          9.19	$       18.23
Part b:
Predetermined Overhead Rate	1317000/1646250	80.00%
Overhead Per unit
Product Cost per Unit:
		Handheld	Home
Direct Material		$   720,000	$   678,000
Direct Labor		$1,245,250	$   401,000
Manufacturing Overheads	80% of Direct Labor	$   996,200	$   320,800
Total Cost	a	$2,961,450	$1,399,800
No of Units	b	300000	88000
Cost per unit	a/b	$          9.87	$       15.91