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 $311,200. During that time, the company produced 13,200 units of the M-008 and 2,500 units of the M-123. The direct costs of production were as follows:

	M-008		M-123		Total
Direct materials	$	105,600	$	100,000	$	205,600
Direct labor		105,600		50,000		155,600

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	$	121,200		8,000		2,000		10,000
Number of production runs		90,000		20		20		40
Number of inspections		100,000		25		40		65
Total overhead	$	311,200

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 your intermediate calculations and final answers to 2 decimal places.)

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

Answer 1

Answer 1:

ABC
	M 008	M 123
Direct material	$ 105,600.00	$ 100,000.00
Direct labor	$ 105,600.00	$    50,000.00
Overheads	$ 180,421.54	$ 130,778.46
Total	$ 391,621.54	$ 280,778.46
Units	13,200.00	2,500.00
Per unit cost	$            29.67	$         112.31

Calculation:

Activity cost pool	Total Cost	Total Cost Activity	Overhead rates	M 008 activity	M 123 activity	Overheads for M 008	Overheads for M 123
Machine related	$ 121,200.00	10,000	$              12.12	8,000	2,000	$                 96,960.00	$                 24,240.00
Production related	$   90,000.00	40	$        2,250.00	20	20	$                 45,000.00	$                 45,000.00
Inspections	$ 100,000.00	65	$        1,538.46	25	40	$                 38,461.54	$                 61,538.46
Total	$311,200.00					$              180,421.54	$              130,778.46

Answer 2:

Traditional Costing
	M 008	M 123
Direct material	$ 105,600.00	$ 100,000.00
Direct labor	$ 105,600.00	$    50,000.00
Overheads	$ 211,200.00	$ 100,000.00
Total	$ 422,400.00	$ 250,000.00
Units	13,200.00	2,500.00
Per unit cost	$            32.00	$         100.00

In case of any doubt, please feel free to comment.