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 $322,400. During that time, the company produced 14,400 units of the M-008 and 2,300 units of the M-123. The direct costs of production were as follows:

	M-008		M-123		Total
Direct materials	$	115,200	$	92,000	$	207,200
Direct labor		115,200		46,000		161,200
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 $ 145,900 1,000 9,000 10,000 Number of production runs 80,000 10 30 40 Number of inspections 96,500 15 45 60 Total overhead $ 322,400 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? (Round your intermediate calculations and final answers to 2 decimal places.) Total Overhead M-008 M-123 Total Unit Cost M-008 M-123 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.) Total Overhead M-008 M-123 Total Unit Cost M-008 M-123

Answer 1

a)			Activity Level				Activity RateS
	Cost Driver		Costs	M-008	M-123	Total
	Number of machine-hours	$	145,900	1,000	9,000	10,000	14.59
	Number of production runs		80,000	10	30	40	2000.00
	Number of inspections		96,500	15	45	60	1608.33
	Total overhead	$	322,400
	ASSIGNMENT OF OVERHEAD:
	Number of machine-hours			14590	131310	145900
	Number of production runs			20000	60000	80000
	Number of inspections			24125	72375	96500
	Total overhead			58715	263685	322400
	COST OF PRODUCTION:
	Direct materials			115200	92000
	Direct labor			115200	46000
	Manufacturing Overhead			58715	263685
	Total cost of production			289115	401685	690800
	Number of units produced			14400	2300
	Total cost of production per unit			$    20.08	$ 174.65
b)	Pre-determined overhead rate based on direct labor cost = 322400/161200 =		200%
	COST OF PRODUCTION:
	Direct materials			115200	92000
	Direct labor			115200	46000
	Manufacturing Overhead			230400	92000
	Total cost of production			460800	230000	690800
	Number of units produced			14400	2300
	Total cost of production per unit			$    32.00	$ 100.00