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 $318,400. During that time, the company produced 13,400 units of the M-008 and 2,600 units of the M-123. The direct costs of production were as follows.

	M-008		M-123		Total
Direct materials	$	107,200	$	104,000	$	211,200
Direct labor		107,200		52,000		159,200

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	$	141,400		8,000		2,000		10,000
Number of production runs		80,000		20		20		40
Number of inspections		97,000		15		35		50
Total overhead	$	318,400

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?

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 unit cost" to 2 decimal places.)

	M-008 M-123 Total overhead Total unit cost

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? (Round "Total unit cost" to 2 decimal places.)

	M-008 M-123 Total overhead Total unit cost

Answer 1

		M-008	M-123
a)	Total Overhead	13.60	52.38
	Total Unit cost	29.60	112.38
	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	141400	10000	14.14	8000	113120	2000	28280
	production runs	80000	40	2000.00	20	40000	20	40000
	Inspection	97000	50	1940.00	15	29100	35	67900
	Total	318400				182220		136180
	No. of Units					13400		2600
	Overhead per unit					13.60		52.38
	Add : Direct material					8		40
	Add: Direct labour					8		20
	Total product cost per unit				29.60		112.38
		M-008	M-123
a)	Total Overhead	17.02	40.00
	Total Unit cost	33.02	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	318400	159200	2.00	107200	214400	52000	104000
	Total	318400				214400		104000
	No. of Units					12600		2600
	Overhead per unit					17.02		40.00
	Add : Direct material					8		40
	Add: Direct labour					8		20
	Total product cost per unit				33.02		100.00