Question

Case 4

Natha Corporation manufacturers two types of travel mugs: Simple, and Sophisticated. The company budgets to produce 20,000 units of the Simple mugs and 10,000 units of the Sophisticated mugs. Manufacturing takes place in two production departments: Machining and Assembly. The Simple mugs are produced in batches of 200 units; however, due to the more intricate detail included on the Sophisticated mugs, they are produced in batches of 50 units.

The company’s Controller has asked you to compare the plantwide, departmental, and activity- based cost allocation methods. To assist in your analysis, the Controller has provided you with the budgeted cost information for the 2020 fiscal year.

Natha Budgeted Information for the Year Ended December 31, 2020
Machining Department	Simple	Sophisticated	Total
Direct materials cost	$90,000.00	$52,500.00	$142,500.00
Direct labour cost	45,000.00	30,000.00	75,000.00
Overhead costs			120,000.00
Machine hours	12,000	18,000	30,000
Direct labour hours	4,000	1,000	5,000
Assembly Department	Simple	Sophisticated	Total
Direct materials cost	$7,500.00	$15,000.00	$22,500.00
Direct labour cost	22,500.00	37,500.00	60,000.00
Overhead costs			40,000.00
Machine hours	6,000	4,000	10,000
Direct labour hours	3,500	500	4,000

Required:

2. Assume that management at Natha Corporation has decided to use departmental overhead rates.
   1. Calculate the departmental overhead rates, based on machine hours in the Machining department and direct labour hours in the Assembly department.
   2. Calculate the total manufacturing cost for each product line.
   3. Calculate the total manufacturing cost per unit for each product line.

Answer 1

a. Calculation of departmental overhead rates, based on machine hours in the Machining department and direct labour hours in the Assembly department.

Machining Department overhead cost = $120,000

Allocation of Machining Department overhead to products on machine hours

Total machine hours = 30,000 hours

Machine hours used for simple mugs = 12,000 hours

Machine hours used for sophisticated mugs = 18,000 hours

Overheads allocated to simple mugs = $120,000 x (12,000 / 30,000) = $48,000

Overheads allocated to sophisticated mugs = $120,000 x (18,000 / 30,000) = $72,000

Assembly Department overhead cost = $40,000

Allocation of Assembly Department overhead to products on direct labor hours

Total direct labor hours = 4,000 hours

Direct labor hours used for simple mugs = 3,500 hours

Direct labor hours used for sophisticated mugs = 500 hours

Overheads allocated to simple mugs = $40,000 x (3,500 / 4,000) = $35,000

Overheads allocated to sophisticated mugs = $40,000 x (500 / 4,000) = $5,000

b. Calculation of  total manufacturing cost for each product line:

Machining Department	Simple	Sophisticated	Total
Direct material cost	$90,000	$52,500	$142,500
Direct labor cost	45,000	30,000	75,000
Overhead Costs	48,000	72,000	120,000
Total manufacturing costs	$183,000	$154,500	$337,500
Assembly Department	Simple	Sophisticated	Total
Direct material cost	$7,500	$15,000	$22,500
Direct labor cost	22,500	37,500	60,000
Overhead Costs	35,000	5,000	40,000
Total manufacturing costs	$65,000	$57,500	$122,500

c. Calculation of total manufacturing cost per unit for each product line:

Machining Department	Simple	Sophisticated
a. Total manufacturing costs	$183,000	$154,500
b. Total Units Produced	20,000	10,000
c. Manufacturing Costs Per Unit (a / b)	$9.15	$15.45
Assembly Department	Simple	Sophisticated
a. Total manufacturing costs	$65,000	$57,500
b. Total Units Produced	20,000	10,000
c. Manufacturing Costs Per Unit (a / b)	$3.25	$5.75