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 $1,273,000 based on production of 340,000 handheld consoles and 106,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,213,250		$	378,000		$	1,591,250
Materials		770,000			708,000			1,478,000

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	$	495,000		35	10	45
Quality tests performed		570,000		13	17	30
Shipping orders processed		208,000		100	60	160
Total overhead	$	1,273,000

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

Part a
	Activities	Costs	Cost drivers	Cost driver total	Overhead rate(Costs/Cost driver total)
	Production Costs	$4,95,000	No. of production runs	45	$11,000	per production run
	Quality Costs	$5,70,000	No. of quality tests	30	$19,000	per quality test
	Shippin Costs	$2,08,000	No. of shipping orders	160	$1,300	per shipping order
	Total	$12,73,000
		Handheld Consoles	Home Consoles
		Activity Based usage	ABC Rate	Activity Based usage*ABC rate	Activity Based usage	ABC Rate	Activity Based usage*ABC rate
	Production Costs	35	$                                     11,000	$                                  3,85,000	10	$                     11,000	$                                   1,10,000
	Quality Costs	13	$                                     19,000	$                                  2,47,000	17	$                     19,000	$                                   3,23,000
	Shippin Costs	100	$                                       1,300	$                                  1,30,000	60	$                       1,300	$                                      78,000
	Total Overhead cost allocated			$                                  7,62,000			$                                   5,11,000
	No. of units produced			340000			106000
	Overhead cost per unit			$2.24			$4.82
	Calculation of Product Cost
		Handheld Consoles	Home Consoles
	Direct material cost per unit	$                            2.26	$                                         6.68
	Direct labor cost per unit	$                            3.57	$                                         3.57
	Overhead Cost per unit	$                            2.24	$                                         4.82
	Product Cost per unit	$                            8.07	$                                       15.07
Part b
	Total Overhead Costs	$12,73,000
	Total Direct labor costs	$15,91,250
	Predtermined Overhead Rate($1,273,000/$1,591,250)	$0.80	per direct labor