Question

Fenway Electronics produces video games in three market categories: commercial, home, and miniature. Fenway has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	360,000		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			194,400		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			105,600		Research and development	Time spent by research department
Facility			300,000		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

   
Additional data for each of the product lines follow:

	Commercial				Home				Miniature				Total
Direct materials cost	$	25.00	/unit		$	15.00	/unit		$	12.00	/unit			—
Direct labor cost	$	10.00	/hour		$	8.00	/hour		$	9.00	/hour			—
Number of labor hours		6,000				12,000				2,000				20,000
Number of machine hours		10,000				45,000				25,000				80,000
Number of production orders		200				2,000				800				3,000
Research and development time		10	%			20	%			70	%			100	%
Number of units		15,000				45,000				14,000				74,000
Square footage		20,000				50,000				30,000				100,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

(For all requirements, round intermediate calculations and "Cost per Unit" to 2 decimal places.)

Answer 1

Part 1)

The total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base is calculated as below:

Companywide Overhead Rate = Total Overheads/Total Direct Labor Hours = (360,000 + 194,400 + 105,600 + 300,000)/(6,000 + 12,000 + 2,000) = $48 per direct labor hour

	Commercial	Home	Miniature	Combined Total
Direct Material	375,000 (15,000*25)	675,000 (45,000*15)	168,000 (14,000*12)	1,218,000
Direct Labor	60,000 (6,000*10)	96,000 (12,000*8)	18,000 (2,000*9)	174,000
Overhead	288,000 (6,000*48)	576,000 (12,000*48)	96,000 (2,000*48)	960,000
Total Cost (A)	$723,000	$1,347,000	$282,000	$2,352,000
Total Units (B)	15,000	45,000	14,000
Cost per Unit (A/B)	$48.20	$29.93	$20.14

_____

Part 2)

Step 1: Calculate Activity Rate

The activity rate is arrived as below:

Activity Cost Pools	Total Activity Cost (C)	Total Activity (D)	Cost Driver	Activity Rate (C/D)
Indirect labor wages, supplies, factory utilities, machine maintenance	360,000	80,000	machine hours	$4.50
Materials handling, inventory storage, labor for setups, packaging, labeling and shipping, scheduling	194,400	3,000	number of production orders	$64.80
Research and development	105,600	100%	research and development time	$105,600.00
Rent, general utilities, maintenance, facility depreciation, admin. Salaries	300,000	100,000	square footage	$3.00

_____

Step 2: Calculate Total Cost and Cost per Unit with ABC

The total cost and cost per unit with the use of ABC is determined as follows:

	Commercial	Home	Miniature	Combined Total
Direct Material	375,000	675,000	168,000	1,218,000
Direct Labor	60,000	96,000	18,000	174,000
Overhead:
Indirect labor wages, supplies, factory utilities, machine maintenance	45,000 (10,000*4.50)	202,500 (45,000*4.50)	112,500 (25,000*4.50)	360,000
Materials handling, inventory storage, labor for setups, packaging, labeling and shipping, scheduling	12,960 (200*64.80)	129,600 (2,000*64.80)	51,840 (800*64.80)	194,400
Research and development	10,560 (105,600*10%)	21,120 (105,600*20%)	73,920 (105,600*70%)	105,600
Rent, general utilities, maintenance, facility depreciation, admin. Salaries	60,000 (20,000*3)	150,000 (50,000*3)	90,000 (30,000*3)	300,000
Total Cost (E)	$563,520	$1,274,220	$514,260	$2,352,000
Total Units (F)	15,000	45,000	14,000
Cost per Unit (E/F)	$37.57	$28.32	$36.73