Question

5. 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.)

	overhead	total cost per unit
handheld		$ 8.07
home		$ 15.07

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.)

	overhead	total cost per unit
handheld
home

Answer 1

Part A
	Calculation of Activity Rate
	Cost Driver	Amount(A)	Total Activity Level(B)	Activity Rate(C=A/B)
	Production Run	495000	45	11000
	Quality tests performed	570000	30	19000
	Shipping orders processed	208000	160	1300
	Calculation of overhead to be assigned
	Activity	Handheld	Home
	Activity Level	Overhead assigned(Activity level * Activity rate)	Activity Level	Overhead assigned(Activity level * Activity rate)
	Production Run	35	385000	10	110000
	Quality tests performed	13	247000	17	323000
	Shipping orders processed	100	130000	60	78000
	Total Overheads	762000	511000
	Calculation of Cost per unit
	Total Cost per unit	Handheld	Home
	Direct Labor	1213250	378000
	Materials	770000	708000
	Overheads	762000	511000
	Total Cost(A)	2745250	1597000
	Units Produced(B)	340000	106000
	Cost per unit(A/B)	$               8.07	$                                 15.07

Part B
	Allocation of overhead using Direct Labor Cost
	Total Overheads	1273000
	Total Labor Cost	1591250
	Overhead rate/ per labor cost	0.8
	Overhead allocated to Hendhald (1213250*0.8)	970600
	Overhead allocated to Home(378000*0.8))	302400
	Calculation of Cost per unit
	Total Cost per unit	Handheld	Home
	Direct Labor	1213250	378000
	Materials	770000	708000
	Overheads	970600	302400
	Total Cost(A)	2953850	1388400
	Units Produced(B)	340000	106000
	Cost per unit(A/B)	$             8.69	$    13.10