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 $328,000. During that time, the company produced 14,500 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	$	116,000	$	96,000	$	212,000
Direct labor		116,000		48,000		164,000

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	$	158,500		1,000		9,000		10,000
Number of production runs		70,000		10		30		40
Number of inspections		99,500		20		30		50
Total overhead	$	328,000

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?

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

		M-008	M-123
a)	Total Overhead	5.04	106.19
	Total Unit cost	21.04	166.19
	Note 1: Overhead allocation sheet
					M-008	M-123
	Activity	Total OH Cost	Total Cost Driver	OH Rate	Driver Incurred	OH Cost assigned	Driver Incurred	OH Cost assigned
	Mahcining	158500	10000	15.85	1000	15850	9000	142650
	production runs	70000	40	1750.00	10	17500	30	52500
	Inspection	99500	50	1990.00	20	39800	30	59700
	Total	328000				73150		254850
	No. of Units					14500		2400
	Overhead per unit					5.04		106.19
	Add : Direct material					8		40
	Add: Direct labour					8		20
	Total product cost per unit				21.04		166.19
		M-008	M-123
b)	Total Overhead	16.00	40.00
	Total Unit cost	32.00	100.00
	Note 1: Overhead allocation sheet
					M-008	M-123
	Activity	Total OH Cost	Total Cost Driver	OH Rate	Driver Incurred	OH Cost assigned	Driver Incurred	OH Cost assigned
	Total Overhead cost	328000	164000	2.00	116000	232000	48000	96000
	Total	328000				232000		96000
	No. of Units					14500		2400
	Overhead per unit					16.00		40.00
	Add : Direct material					8		40
	Add: Direct labour					8		20
	Total product cost per unit				32.00		100.00